With the RBI announcing two consecutive repo rate cuts this year, home loan borrowers may be expectant about a reduction in their existing EMIs.
However, as the effective interest rate on your home loan is dependent on factors like marginal cost of funds, operating cost, tenor premium, and spread levied by the lender, a repo rate cut may not necessarily imply immediate transmission of the benefit of rate cuts.
This often prompts borrowers to opt for balance transfer to benefit from the rate cut. But before going ahead, it would be worthwhile to consider the following situations where it would be beneficial to opt for home loan balance transfer:
SWITCH TO MCLR-BASED RATE SETTING REGIME
Effective from April 1, 2016, the RBI mandated banks to follow marginal cost based lending rate (MCLR) regime.
Compared to the prime lending rate (PLR) based rate setting system followed by NBFCs and HFCs, MCLR-based mechanism offers more transparency and higher transmission of policy rate benefits to borrowers.
“The presence of pre-set loan reset dates in the MCLR regime ensures that the existing interest rate being served by the borrower would remain unchanged till the next reset date, even if the bank’s lending rates change during the interim period. The existing home loan borrowers, who are servicing loans based on the PLR regime of NBFCs and HFCs, should consider opting for the MCLR-based rate system, by transferring their current home loan to a bank offering lower rates based on MCLR,” Naveen Kukreja, CEO and co-founder of Paisabazaar.com, says.
Substantial saving in overall interest cost: Borrowers usually opt for home loan balance transfer to reduce their overall interest payout on the outstanding loan amount.
However, before switching the lender, make sure you take into consideration all associated fees and charges. Remember that whenever you apply for a balance transfer, the new lender will consider it as a fresh home loan application, and therefore may levy charges like processing fee and administrative charges.
“It is extremely important to consider regular charges while calculating overall savings on your interest cost. It’s prudent to go ahead and switch only if the interest saving is substantial and outweighs the total cost involved, if any. If not, it’s better to continue with your existing lender and negotiate,” Kukreja says.
WHEN YOUR REQUIREMENT FOR TOP-UP LOAN IS NOT MET
Top-up loan can be availed over and above your outstanding home loan amount, and does not involve any restriction on end usage of funds. Moreover, the interest rate involved on top-up home loans is usually cheaper than most secured loans, even personal loans, and the tenure is usually either the same as the outstanding tenure of the home loan, or up to 15 years.
“Home loan borrowers whose existing lenders have either rejected their top-up loan request or does not offer a top-up loan, may consider balance transfer for fulfilling their additional requirement for funds. Also, borrowers may consider home loan balance transfer in case the top-up amount sanctioned by their lender isn’t sufficient to meet the actual requirement,” Kukreja says.
FAILED NEGOTIATION WITH EXISTING LENDER
Opt for home loan balance transfer if your existing lender rejects your request to lower the interest rate. However, before switching, remember that the new lender would also impose its own set of terms and conditions upon your home loan.
Thus, before deciding upon anything, consider balance transfer as an opportunity to either reset your loan tenure or avail a higher loan amount as per your requirement, since some lenders offer the facility of top up along with balance transfer.