by Shreekant Rao
Published Thu, Feb 2nd 2017, 14:16 | Finance
A loan to buy a house that often spills into 20 years is keenly watched by the borrower since a sizeable amount of his income goes in servicing it. A home loan involves a substantial amount of money and hence the interest rate on the product is a matter of concern for every borrower.
Home loan interest rates range anywhere between 9.8 % to 12 % and it is advisable that a borrower look to reduce the interest rate if he has paid his EMIs diligently for a few years. The most common ways to reduce interest rates is to either go for a balance transfer of the loan or talk to the bank that has provided you the loan to reduce it.
Balance Transfer:
Home Loan Balance Transfer of a loan happens when the entire unpaid principal loan amount is transferred to another bank for a lower rate of interest. The bank that had originally extended the loan to you gets the unpaid amount and you have to, in turn, now pay your EMIs at the new rate to the bank that has taken up the loan. Almost every bank in the country has a facility for a balance transfer of home loans and if you have been paying your EMIs regularly, there is often no problem associated with it.
There is, however, a need to carry out a cost benefit analysis. Balance transfer will depend on the difference between the interest rates offered by the two banks, the amount of the loan left unpaid and the tenure remaining. If the unpaid amount is low or if only a few years remain in terms of tenure, balance transfer may not be ideal. This is also because banks often levy a processing fee for balance transfer and in the end it may not be all that beneficial.
Balance transfer works best if you are in the early periods of your home loan. In such a case even a 50 basis point reduction will be very beneficial. For example, if Rs 50 lakh is left unpaid for your home loan and your current interest rate is 12 %, you would have to pay Rs 58, 01,513 as interest. If you opt for a balance transfer and your new interest rate is at 11.5 %, your interest outgo over 15 years would be Rs 55, 13,708 or a total savings on interest of Rs 2.87 lakh.
[Source: http://economictimes.indiatimes.com/small-biz/money/should-you-balance-transfer-your-home-loan-or-reset-it/articleshow/47688545.cms]