When to opt for balance transfer in home loan?

Home loans are mostly availed for the long term and even a marginal shift in interest rates can dramatically increase the total loan cost over time. Home loan interest rates have significantly moderated after peaking a couple of years ago. Borrowers who availed home loans at higher rates should reassess their loan terms and explore home loan balance transfer options.

Home loan balance transfer allows borrowers to migrate their outstanding principal to a new lender offering more competitive rates and favourable terms. Understanding when the balance transfer is optimal can help save on the loan cost significantly. Here’s what you need to keep in mind:

If your existing lender is charging a higher interest rate than the prevailing market rates, transferring your home loan to another lender offering lower rates can help reduce your overall borrowing cost.

Even a small reduction in the interest rate can result in significant savings over the loan tenure. For instance, a reduction of 50 basis points in the interest rate after 4 years of repayment of a ₹1 crore home loan for 30 years at an initial interest rate of 8.75% p.a. can reduce the interest outgo by more than 10 lakh over the repayment period.

A larger portion of the EMI is allocated towards interest repayment rather than principal repayment during the initial years of a home loan. As the loan tenure progresses, the interest component gradually reduces while the principal repayment component increases.

Opting for a home loan balance transfer during the early stages of repayment is usually more beneficial. Transferring the loan in the later years may not generate substantial savings.

Borrowers who availed home loans long ago may still have loans linked to older benchmark structures such as the base rate or MCLR regime, often carrying higher spreads. As a result, even when RBI reduced repo rates, many borrowers did not receive the full benefit immediately.

After the adoption of RLLR/EBLR, new home loan rates depend directly on RBI repo rate changes that transmit benefit more quickly from rate revision to borrowers. Opting for a balance transfer to an EBLR/repo rate-linked loan can help borrowers benefit from rate reductions faster.

Borrowers who may have secured a home loan earlier at a higher interest rate due to a lower credit score can consider a low-interest rate home loan balance transfer when their credit profile improves over time. A stronger credit score, usually 760 and above, generally enhances the chances of securing lower interest rates and more favourable loan terms from lenders.

When the Outstanding Principal is HighIt is advisable to opt for a home loan balance transfer when the outstanding principal amount is still high, as transferring a larger loan amount at a lower interest rate can lead to substantial savings over the repayment tenure.

Considering the previous instance, even if the borrower paid the loan for 20 years, the outstanding principal would still remain around ₹42 lakh. At prevailing rates of nearly 7.5% p.a., the borrower can still save close to ₹4 lakh over the loan duration.

A home loan balance transfer can be an effective financial strategy for borrowers looking to reduce their overall borrowing cost. However, a lower interest rate alone should not be the sole factor driving the decision.

Borrowers should carefully evaluate the total savings after accounting for processing charges, foreclosure fees, insurance premiums, legal expenses and other associated costs. It is equally important to assess whether the remaining loan tenure is sufficiently long to generate meaningful savings, as transferring a loan nearing completion may offer limited financial benefits.

Before proceeding with a balance transfer, borrowers should compare offers from multiple lenders, calculate the revised repayment outgo using a Home Loan EMI Calculator, evaluate their financial stability and understand the long-term implications of the switch.

(The writer is CEO, Paisabazaar)