If you're planning to switch your home loan to another bank, know these things first.
Taking out a home loan is a major decision for most Indians, as it often becomes the longest and heaviest financial burden of their lives. Many people today opt for a home loan balance transfer, meaning they transfer their outstanding loan from one bank to another, to secure a lower interest rate. But is this always beneficial? The answer may vary from bank to bank. Therefore, it's crucial to understand some key factors before taking this step.
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Lower interest rates don't always pay off.
Of course, getting a loan at a lower interest rate sounds great. Let's say your current bank is charging you 9% interest, and another bank is willing to offer you a loan at 8.5%. A difference of half a percent may seem small, but if the loan tenure is long, it can save you lakhs of rupees.
But note that this benefit is mostly realized when the transfer is made at the beginning of the loan term. A large portion of your EMI goes towards interest in the initial years, so the benefit of lower interest is greater then. Transferring in the final years of the loan is less beneficial, as you are then repaying most of the principal.
Know the hidden costs of transfer
Loan transfer is not a free process. The new bank may charge you various expenses, such as processing fees, valuation fees, and legal charges, before granting you the loan. These expenses can sometimes range from thousands to lakhs, which can eat into your total savings.
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Not just rates, but facilities also matter
Some people consider transferring because of the bank's facilities rather than the interest rate. The new bank may offer you benefits like top-up loans, flexible EMI options, and lower prepayment charges. If your current bank has strict rules, such as imposing a penalty on every prepayment, a new bank may prove more convenient.
When not to transfer a balance?
If you've already paid off more than half of your home loan, a transfer won't be particularly beneficial. This is because a larger portion of the EMI is now going toward the principal, leaving less for interest. Furthermore, if your credit score has declined, the new bank may refuse to offer you a loan on better terms. Transferring in such a situation can be more challenging.
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