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What you must know about Home Loan Refinancing and Balance Transfers

What is a Balance Transfer?
Why should I go for a Balance Transfer?
What conditions and fees might be imposed on me for a Balance Transfer?
Should I Refinance even if the fees are high?
Am I eligible for a Balance Transfer?
Can I get any tax benefits with a Home Loan Refinancing?
What is the process and what documentation do I need?
3 tips to keep in mind for Balance Transfer - Do's & Don'ts

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What is a Balance Transfer?

When you refinance your current home loan with another lender, it is commonly loan as a "Balance Transfer", i.e., you are transferring your outstanding home loan balance from one lender to another. The way it works is that the new lender gives your old lender the money outstanding on your loan. Your liability and obligation towards repaying the outstanding amount is now towards the new lender.

Why should I go for a Balance Transfer?

1. To lower your interest payments: When the prevailing interest rate in the market is lower than the interest rate at which you got your loan, it does not make economic sense for you to continue to pay a higher EMI than what you could get by refinancing your loan.
2. To change the terms of your loan: You might want to extend the tenure of your loan or change certain existing terms. However, your existing lender might not be agreeable to these requests. In this situation, you might consider moving to another lender if they are agreeable to the new terms.
3. Use the value of your house to get a top-up loan: Since the time you originally took a home loan to finance your property the value of your property might have appreciated. At the time of your refinancing, your new lender might be willing to give you a top-up loan against the rise in the value of your property. You can create liquidity for your financial situation using this cash. Top

What conditions and fees might be imposed on me for a Balance Transfer?

Firstly, your existing lender has no incentive to transfer the loan to another bank. So it will create some hurdles for you by requiring you to continue with the loan for a minimum period. Check with your lender if you have met this hurdle or not.

Secondly, the original lender might charge you a penalty fee, which could be anywhere between 2%-4% of the principal amount of the loan outstanding at the time of your refinance. Example, if you have Rs. 20 lakhs still outstanding on the loan, with 15 years remaining on the loan tenure, you might be expected to pay a 3% penalty fee of up to Rs. 60,000 to transfer your loan.

However, if you are paying off this loan with your own funds, the lender might waive this charge.

Finally, the new lender that you are going to for their cheaper home loan rate might charge you a loan processing fee (plus service tax) of anywhere between a minimum of Rs 5,000 to a maximum of 1% of the loan amount (depending upon whether you are self-employed or an employee). Top

Should I Refinance even if the fees are high?

Please keep in mind that the refinancing should still make practical sense for you after you have paid out the pre-payment penalty to your existing lender and the new loan processing fee to your new lender. If net of these expenses you will not end up saving any money, then it is pointless to refinance. In fact, it could just be a big administrative hassle for you do so.

Using the sample figures used in the previous question, the total cost to refinance comes to the sum of the penalty fees and the loan-processing fee, i.e., Rs. 60,000 + Rs. 5,000 = Rs. 65,000.

On the savings side, lets say you can get a loan for 1% cheaper interest rate than your existing loan. That would mean a reduction in your EMI of approximately Rs. 1,236, for a cumulative savings of approximately Rs. 121,000 over the remaining 15 years. (Not to get too technical, but for those of you familiar with the concept of present value in finance, this Rs. 121,000 is the present value of the savings that you will make over the remaining tenure of the loan.)

So, a refinancing makes sense only if you save more money on the lower home loan rate compared the penalties and processing fees that you might have to pay. In our example we can save Rs. 121,000 less Rs. 65,000 = Rs. 56,000 through the refinancing, and it makes sense to do so. Top

Click here for home loan refinancing calculator

Am I eligible for a Balance Transfer?

Balance transfers are available to both salaried and self-employed persons.

However, there are restrictions on the minimum and maximum age, as well as minimum income criteria. These might vary according to lender, so do your research to see which lender suits you the most. Top

Can I get any tax benefits with a Home Loan Refinancing?

Yes! You can get the same benefits as you did under your previous home loan.

First, you can avail of the annual Rs 1 lakh deduction under section 80C towards repayment of your principal amount of the loan. Second, you can get up to Rs. 1.50 lakhs annual deduction under section 24 towards payment of interest on the loan. Top

What is the process and what documentation do I need?

The documentation for a Balance Transfer is very similar to what you supplied for your original home loan. The following are the typical steps in a Balance Transfer. Each lender's actual steps might vary depending upon their internal processes. Some of the following steps might be operating in parallel.

Please keep in mind that the disbursement from the new lender will occur only after the old lender has released to them the original documents showing your ownership in the property that you are refinancing. So, please ensure that there are no delays from the old lender on this step. Top

3 tips to keep in mind for Balance Transfer - Do's & Don'ts

1. Calculate whether it still makes economic sense to refinance net of the fees and charges you might be forced to pay
2. Confirm with the new lender that the low rate is not a teaser rate that will be contractually raised after say 6 months or pre-determined minimum period. Read the fine print
3. Ensure that your paperwork is in order for the new lender, especially the property ownership papers, otherwise the disbursement can get delayed Top

Comments

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Prakhar said : 11/08/2009	Thanks for sharing this important piece of information.