Transferring of an existing Home Loan from one Bank or Financial Institution to another is termed as a Balance Transfer (BT). This process makes you continue the loan but with new lender on changed terms and conditions. Mostly the loans have a floating interest rates. Whenever there is a hike in the Marginal Cost of Funds based Lending Rate (MCLR), The interest rate gets affected. Hence, a Balance Transfer can act as your only defense against the rate surge.
The reason for opting for a Balance Transfer should be clear, let us look at some of the tangible benefits
1. Lower Interest Rates
This is usually the main reasons for opting a balance transfer. Needless to mention that Banks and Financial Institutions offer competitive rates for those borrowers who are early in their loan tenor and have an outstanding repayment history.
Hence, one must carefully weigh in the loan tenor they are left with, the interest rate benefits they would be getting and the CIBIL score. Banks or Financial Institutions settle most of the interest payable through EMIs in the first few years. The monthly payment you pay afterward are essentially settling your principal component. That being said, if you make an untimely decision, you’ll end up paying interest again on the full principal amount you initially borrowed.
2. Availing Top-Up Loan
This is a service offered by most banks in case of Balance Transfer. The new bank will provide a loan of upto 80% of the market value of the property to the borrower. The difference between the original sanctioned amount with the old bank and the new sanctioned amount after balance transfer is offered as a Top-Up Loan.
For example,
• If a customer has availed Rs. 50 Lakhs from Bank X at a rate of 10% PA and the present outstanding is say 30 Lakhs.
• Assuming the interest rate offered by Bank Y is 8.75% PA and current market value of property to be Rs. 70 Lakhs.
• Borrower decides to go for a Balance Transfer and Top-Up Loan, the bank Y in this case will provide maximum loan upto 80% of the market value of the property. i.e., 56 Lakhs.
• From the new sanctioned amount by Bank Y, the original sanctioned amount by Bank X would be considered at the usual Home Loan Rate of Bank Y.
• After the balance transfer the difference is: Rs. 56 Lakhs (Bank X) – Rs. 50 Lakhs (Bank Y) = Rs. 6 Lakhs
• The remaining Rs. 6 Lakhs is offered as a Top-UP loan to the borrower at the commercial rate by Bank Y. If the difference is within the original sanctioned amount the Top-Up loan is offered at the House Loan Rate.
3. Benefit of better banking and loan services
This is step may also be taken in order to shift to bank with a better customer support, customized schemes, hassle-free online services along with other offers and benefits. Although, this is not the pivotal reason to the decision making process, but it plays a significant role considering the long tenor of the loan.
4. How to initiate a Balance Transfer
a. Secure a pre-approval from the new bank offering lower interest rates (This shall include assessment of your property, your payment history, remaining loan tenor etc)
b. Submitting a request letter to the existing bank for loan transfer
c. Get an NOC/ consent letter along with all required documents for the mortgaged property from your existing bank
d. Once the papers along with NOC/consent letter are submitted with the new bank, they disburse the amount to your old bank for account closure. After the account closure the new bank will start handling your loan account and documents.