All you wanted to know about Home Loan Balance Transfer
With intense competition in the home loan segment, the home loan borrower is pampered with choices not only at the time of taking home loan but also later on when he can shift his home loan from his existing home loan lender to new lender.
What is a balance transfer and what are the documents required?
The process of shifting your existing home loan to another home loan provider, who provides you better terms and conditions, is called balance transfer. The shifting of home loan may be from one bank to another bank or from one housing finance company to another housing finance company or even from one category to another category of home loan lenders. Home loan is nothing but availing your home loan second time on the same property from another lender and transferring the amount of new home loan to pay the existing outstanding of the home loan.
So broadly, documents required to be submitted for availing the balance transfer facility are almost the which you are required to produce at the time of getting the fresh home loan except for property documents part. These include documents like your income proof, address proof, bank statements etc. Since the property documents are lying with the existing lender, the same are generally handed over to the new home loan lender by the existing lender after its upto date dues are fully paid off by the new lender.
Purpose of availing the balance transfer facility
There may be many reasons and purposes for going for balance transfer. For example due to unfavourable credit history, you were not able to avail the home loan from banks who are little more stringent than the housing finance companies and had to take the home loan from a housing finance company at higher rate of interest. With timely servicing of your existing home loan, now you are eligible to get cheaper home loan from a bank. Likewise with advent of base rate and subsequently Marginal Cost of fund based Lending Rate(MCLR) available with banks you are able to get better terms from the bank while your home loan is with housing finance company.
There may be other situations, in addition to availing better rate of interest that you may go for balance transfer. Like after having served your home loan for some time, you may need some funds either for repairs of the property or even for your personal purpose. In such a situation, you may think of availing a top up loan which your existing lender may not provide so you may have to go for a balance transfer to the lender who provides top up loan on your existing home loan. Likewise you may need to extend your home loan tenure beyond what is left to be served with existing lender for reasons like temporary loss of income or amount of EMI going up due to interest rate hike etc.
In case of balance transfer of your home loan, what happens is that you prepay your existing home loan lender and take fresh home loan from the new lender which involves payment of fee to both the lenders. The existing lender may charge you prepayment penalty, for prepaying the home loan before its tenure, depending on whether your home loan is under floating rate or under fixed rate regime. As per National Housing Bank (NHB) who regulates housing finance companies in India, housing finance companies can not levy any prepayment penalty in case the home loan is currently under floating rate.
Even they can not recover the prepayment penalty in case of fixed rate home loan if the borrower repays the home loan otherwise than by way of balance transfer. As per Reserve Bank of India (RBI) which governs all the banks in India, the banks are not allowed to levy the prepayment penalty on home loans under floating rate. Likewise your new lender may also ask for payment of processing fee as well as documents and legal charges. Few of banks like SBI in the past had capped the processing charges on balance transfer to them so please check the processing charges applicable from your prospective lender.
Process for documentation transfer
As explained above the procedure for processing the home loan application with the prospective home loan lender in case of balance transfer is almost the same except in respect of property document transfer from existing lender to prospective home lender. Since the property documents are lying with your existing home loan lender who will not part with the property papers unless and until its dues are fully paid off and the prospective lender will not give you the money unless it gets the property documents in its possession.
On the face of it the problem looks like proverbial egg and chicken story. But in practice it is not so. In case of balance transfer you need to obtain a letter addressed to the prospective lender stating the amount outstanding as of a near future date on payment of which the existing lender promises to hand over the documents to the new lender. So once your home loan application is processed and approval in principle is given, the process of transfer of property documents can also be carried out seamlessly by both the lender without even your active involvement.
When should you transfer your home loan?
The decision to go for a balance transfer would depend on various factors and major one is the benefit in terms of rate interest which the prospective lender is offering to you. So before going for balance transfer with its accompanying cost, you have to weigh the cost of balance transfer against the benefits accruing to you in future. So in case the balance tenure is longer, it makes sense for you to go for balance transfer. A thumb rules can not be prescribed and the answer would vary from a person to person depending on peculiar situation he is in.
Income tax implications
When you transfer your home loan from one lender to another lender under the balance transfer, this is still considered as home loan and you are entitled to claim the tax benefits in respect of the second home loan too. There is no clear provision as regards benefits available under Section 80 C in respect of repayment principle amount but Section 24 specifically that any loan taken to repay the earlier loan shall be treated as home loan.
I am sure with the above discussion all your doubts about balance transfer are put to rest.
Switching Lenders – Cause and Effect
The basic premise of taking such a step is to be benefited by way of lower interest rates on loans. Banks are known to offer lower interest rates to new loan consumers, rather than the existing ones.
Let’s take an example. Say ‘A’ took a loan at an interest rate of 8.50 percent in 20002-2003 from lender ‘X’. The interest rates have increased on the loan since then and currently he is paying an interest rate of 13 per cent.
Another consumer, say ‘B’ approaches ‘X’ for a loan and gets an interest rate of 11.50 percent.
The option available for ‘A’ to transfer his loan to another bank ‘Y’ if the interest rate offered is lower than the one ‘A’ is paying currently.
So, in a nutshell, it makes sense to transfer the loan to another bank only if the gain (in terms of interest range) is to the tune of 1 percent (or more). The ‘Should I Switch my loan’ will give an empirical, close to accurate idea in figure to a consumer to gauge whether the switch will be beneficial.
Shop for a better deal
Before one decided to switch lenders, shop for a deal. Approach various lenders with the intent of transferring the loan. The success of the deal or the lack of it will be dependent on the income of the applicant and the repayment track record. It is necessary to get a rough idea of the offers available from the potential lender/lenders.
As a first step, inform the current or the existing lender or the bank about your intent to transfer the loan. This can be done by submitting a letter to them. The intent is to be communicated in written form to them.
Major Variables in Home Loan Balance Transfer
Two aspects associated with BT are prepayment penalty and processing fee. Lending is the business of the bank and the interest on the loan, one of its major sources of income. This is one of the major reasons why a bank would charge a consumer, should he desire to switch lenders. This charge is known as ‘prepayment penalty’, the definition varying from bank to bank. Normally, a bank will charge up to 2 per cent of the total loan outstanding as a prepayment penalty.
Just as there is a cost to pay for a transfer, the new lender will also charge a processing fee to take over the loan. It can be about 0.50 per cent to 1 per cent of the total loan amount one applies for.
It is necessary to check the probable terms and conditions relating to the loan transfer charges to be borne by the applicant.
By now, we have established that banking, like any other industry is a business and that lending is a revenue generating activity, not based on philanthropy or good-will. This brings up a question, why do we switch lenders? Will it make a difference? All will be the same. Yes, it will.