Due to the long tenor of a typical home loan, a lot can change in the economy between the start and end of repayment term. Often, interest rates may fall significantly after one opts for such credit. Refinancing or balance transfer is often the only way to take advantage of more attractive terms once your home loan repayment has commenced.
However, assessing when and why home loan balance transfer facility is beneficial, can help maximise its advantages.
It is an efficient way of transferring the outstanding balance to a lender offering an affordable home loan interest rate. However, there are several points to be considered before opting for refinancing.
Things to consider while refinancing your home loan
Homeowners who have availed housing credits at a high interest rate should keep a tab on the offers notified by lending institutions. As per RBI, the housing loan interest rate should be updated every three to six months by HFCs.
It is advisable to understand how does a home loan balance transfer work to make efficient savings. Undertaking the same at improper times can compromise benefits, and may even lead to increased expenses for a borrower.
- Loan tenor
As the interest component on a home loan EMI is relatively high in the initial stages of repayment, opting for refinancing during first half of the tenor seems beneficial. Early loan balance transfer helps to save money by reducing interest payment substantially.
- Check for additional costs
Most HFCs charge a specific fee on a home loan transfer. Borrowers should be aware of additional expenses like processing fees, application fees, foreclosure charges, etc. In this regard, one can utilise a loan balance transfer calculator to determine the additional fund requirement. However, as the processing charges can be relatively high, an individual must opt for refinancing only when the tenor is longer.
In this regard, one can compare lenders who have minimal charges on refinancing. Selecting such lenders would aid in reducing the interest payment further and support healthy savings.
Many HFCs also provide additional features like pre-approved offers to simplify lending and accelerate the process on products like home loans and loan against property. These offers make loan applications quite convenient and hassle-free. Check your pre-approved offer by entering basic details like name and contact number.
- Reliability of the new lender
Many financial institutions offer lucrative benefits and the affordable interest rate on their home loan. However, many make false claims. Therefore, researching the authenticity of a lender for home loan refinancing is a vital task.
It is advisable to opt for a lender with a brand name or reputation in the financial market.
- Debt-to-income ratio
Debt to income refers to the proportion of liabilities or dues against an individual’s income. Low debt to income ratio signifies that one does not have several existing loan repayments at that given point of time. A low ratio indicates that one is creditworthy and chances of default is minimal.
- Tax benefits
Refinancing a loan does not normally offer any tax benefits to borrowers. However, if one decides to opt for a top up loan, alongside the transfer, he/she is eligible for deductions of up to Rs.30000 under Section 24b of the Income Tax Act.
The above-discussed factors must be researched well before opting for a home loan transfer. One must remember that during refinancing, the difference between the new and old housing loan rates must be 0.5% or more to benefit borrowers significantly.
