Home Loan Balance Transfer: Owning a home is a dream for many of us. A home saves us from the hassles of staying in a rented property, where shifting every now and then becomes a headache. But purchasing a home in cash is nearly impossible for the majority of home buyers. They take a loan from a bank, NBFC, or housing finance company. These home loans are for a long duration, and because of that, one pays huge interest along with the principal amount as repayment.

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E.g., if you take a Rs 50 lakh loan for 20 years at an annual interest rate of 8.50 per cent, your interest in that duration will be Rs 5413879, which clearly outweighs the principal by over Rs 4 lakh.

There is no way to escape the loan interest, but there are effective ways to reduce the burden of interest. One of the prominent ways is repayment. 

Atul Monga, CEO and Co-Founder, Basic Home loan, says, "Transferring your home loan balance to another lender offering a lower interest rate can significantly reduce your total interest payments. This process involves moving your outstanding loan amount to a new lender with more favourable terms, potentially lowering your monthly EMIs or shortening the loan tenure. However, it's crucial to account for associated fees like processing, administrative, and legal charges." 

How does repayment work? 

Suppose you have a Rs 40 lakh home loan at a 9 per cent interest rate for 20 years.

You have paid the loan for 10 years, and halfway through your journey, you get an offer from a bank, which is offering you to transfer the remaining amount at an 8 per cent interest rate.

After paying all types of fees, such as processing fees, administrative charges, and legal fees, you transfer the balance amount to the new bank.

It may benefit you in two ways: first, you can reduce your equated installment amount (EMI) compared to the EMI of the previous loan, or, you can repay your home loan earlier than the stipulated time by paying the same EMI as before.

It will also reduce your prepayment amount.

To understand this more precisely, we give you a scenario of how a balance loan transfer works.

Suppose, you have a home loan balance of Rs 45,00,000 at an interest rate of 9.5 per cent and a remaining tenure of 15 years.

If you get an offer of 8.50 per cent from another lender for transferring your loan balance, how would it impact your repayment schedule and total interest paid over the loan's duration?

Also, if you opt for a balance transfer, what are the typical fees and charges involved that you should be aware of.

Switching your home loan to another lender with a low interest rate can help you save money over the long term.

Let's break down how a balance transfer from your current loan at a 9.5 per cent interest rate to a new loan at an 8.5 per cent interest rate might impact your repayment schedule and total interest paid.

Repayment Schedule

When you transfer your balance to a new lender at a lower interest rate, your monthly payments may decrease.

This is because the interest component of your monthly payment will reduce due to the lower interest rate.

However, the principal component may remain relatively similar unless you choose to extend or shorten the loan tenure.

Total Interest Paid

With a lower interest rate, you'll end up paying less interest over the life of the loan.

The exact amount of interest saved can be calculated based on the difference in interest rates and the remaining tenure of the loan.

Current Loan Scenario  New Loan Scenario (after Balance Transfer)
Principal Amount: Rs 45,00,000 Principal Amount: Rs 45,00,000
Interest Rate: 9.5% Interest Rate: 8.5%
Tenure Remaining: 15 years  
   
Impact on Repayment Schedule and Total Interest Paid 
Current Loan Interest Calculation:  New Loan Interest Calculation:
Total interest payable over 15 years at 9.5% is Rs 39,58,220 Total interest payable over 15 years at 8.5%is Rs 34,76,390
Savings: Rs. 4,81,830
   
Monthly EMI Comparison
Current EMI at 9.5%: Approximately Rs 46,990 New EMI at 8.5%: Approximately Rs 44,313

Chart Courtesy: Basic Home Loan 

 

Fees and Charges

This is an important component that you should consider while opting for a home loan transfer.

Typical fees may include processing fees, administrative charges, legal fees, etc.

These fees can vary among lenders, so it's essential to inquire about them before making a decision.

Given the significant reduction in both EMI and the total interest paid, a balance transfer seems advantageous.

However, you need to make sure that the savings from the reduced interest rate outweigh the fees and charges associated with the transfer.

It's advisable to consult with both your current lender and the prospective lender to understand the complete financial implications before proceeding with the balance transfer.