Home loan balance transfer: when switching lenders pays off

How a balance transfer works

The new lender pays off your outstanding balance with your old lender, and you then repay the new lender at the new rate. Your property papers move from the old lender to the new one, and the new lender goes through its own checks: your credit score, income and the property valuation.

You can sometimes also take a top-up loan on the same property from the new lender, though that adds to what you owe and is a separate decision from the transfer itself.

What it costs

• The new lender's processing fee, and possibly legal and valuation charges.
• Any fee the old lender charges to release the loan. Under current rules, floating-rate home loans to individuals generally have no prepayment penalty, but check your loan agreement, especially if it is fixed-rate.
• The time and paperwork involved, and a possible gap during which you pay both.

A worked example

Suppose you owe 40 lakh rupees with 15 years left. At 9 percent the EMI is about 40,571 rupees. At 8.5 percent it is about 39,390 rupees. That is roughly 1,181 rupees less per month, or about 2.1 lakh rupees over the 15 years, before any costs.

If the switching costs are, say, 30,000 to 40,000 rupees, the saving comfortably exceeds them. But if the rate difference were only 0.1 or 0.2 percent, or if only three years were left on the loan, the costs could wipe out the benefit. The exact numbers depend on your loan, so use the balance transfer calculator to check.

When it tends to be worth it

• The rate gap is meaningful, often around half a percentage point or more, though what counts depends on your balance.
• Many years remain on the loan, so the saving keeps accumulating.
• You are early in the loan, when interest is the biggest part of each EMI.
• Your credit profile has improved since you took the loan, so the new lender may offer a better rate.

Ask your current lender first

Before doing the paperwork, ask your existing lender whether it will lower your rate or move you to its current offer. Many lenders will, sometimes for a small conversion fee, which is far less hassle than a transfer. Have the competing offer ready as leverage.

This is general information, not personal financial advice. Compare the full cost, including every fee, before you switch.