Balance transfer is a great option that allows and benefits from a downward movement in interest rates. Balance transfer of loan refers to the transfer of the outstanding principal amount of the loan from one bank to another bank for a lower interest rate and favourable loan terms and conditions.
When the EMI’s are regularly paid, transfer of an existing loan is not a difficult task. It’s an important and a big financial decision that needs a thorough detailing. In this process the new lender replace the old mortgage with a new one with new terms and conditions. The terms and conditions vary from an individual to an individual; lender to lender. The customer also gets an opportunity to choose favourable tenure, EMI at lower interest rates which eventually reduces the overall Interest payable and monthly outflow on the loan.
Lending rates vary with market conditions. Loans available with fixed rates, the lender may not lower the rate for the customer which leads the customer opt for balance transfer and move to a new lender at a better pricing of the loan. We need to understand that Balance transfer is not a second mortgage where an asset provides money over an existing mortgage. Balance transfer gives completely a new mortgage with more of favourable terms and conditions. Asking for low processing fee & no prepayment penalties can be a good step while negotiating a balance transfer.
Whether one should go for a balance transfer or not??Just a close look is needed to analyze the benefits associated for transferring the loan from existing lender to the new lender. Few points to be noted before deciding for a balance transfer of a loan are as under. (To know more about which are the factor that effect your loan EMI).
Shorter / Longer Term & Tenure
When a customer starts with a loan with a longer tenure and then decides to shorten it after few years. This allows to pay off the loan at the earliest and save a lot of money to be paid over the actual term of the loan. Whereas the monthly instalments can also be lowered by extending the payoff date, so that each month an individual will be paying less of principal amount.
For example If Rs. 1 Cr. is left unpaid for 10 years on the current mortgage loan and the Rate Of Interest (ROI) is 11%, one have to pay RS. 6530001 as an interest payment. Opting for a balance transfer with a new ROI at 10% the interest payment for the next 10 years would be Rs5858088. The total savings on the total interest payment over 10 yrs will be Rs. 671913 by the reduction of just 1% in the rate of interest. It’s a substantial saving on Interest. So it is advisable to opt for a balance transfer for the reduction in rate of Interest.
Though it completely depends on the loan terms, the cost of the loan transfer and the interest rates, still balance transfer of loan creates a possibility to pay a lesser amount as a total interest as well as EMI. It is important to be sure on the calculations with the cost associated to balance transfer and the total payments with the previous loan. Balance transfer works best if an individual is in the early period of the mortgage loan (home loan/ loan against property). In such a case even if 0.5% reduction in rate of interest will be very beneficial. Reduction in EMI can also help in managing the monthly cash flow of an individual.
For Example If Rs. 1 Cr. Is left unpaid for 10 years on the current mortgage loan and the Rate of Interest (ROI) is 11%, one have to pay Rs137750 as EMI. Opting for a balance transfer with a new ROI at 10% the interest payment for the next 15 years EMI would be Rs 107460. The total savings on the monthly EMI by way of balance transfer will be Rs. 30290 by just the reduction of 1% as a rate of interest.
This refers to a situation when an individual significantly starts making more income as before at the time of taking a loan. Paying more amount on the mortgage every time may not be allowed on the previous loan. Where as Balance Transfer can be an ideal option to choose a lower term to pay off the mortgage sooner. There is a thumb rule that lower the tenure of the loan lower would be the total interest paid on the loan
Another advantage of balance transfer is the lower interest rates and the lucrative offers on the new loan products. Changes in lifestyle or financial situation allow benefiting with lower interest rates along with the additional amount benefits as a top up on the existing loan etc.
With the balance transfer an individual gets an extra benefit of getting a top up on an existing loan outstanding. The extra amount received can help to settle the other loans running on higher rate of interest and reduce the monthly instalments. The interest rates on Mortgage is comparatively much lower than unsecured loans, that helps in saving on the total interest payments. This loan also provides an extra benefit of tax exemptions as the top up usually get booked on the terms of original loan conditions. (Understand the basics of Debt Consolidation).
Combine Two loans into One
Two different mortgages from a different lender can be replaced with a new and a single takeover with lower interest rate. It is convenient to pay one single monthly payment, instead of two or more. Also in some cases it gives an advantage in getting one of the collateral released from the lender bank if the valuations of property offered as security fulfils the loan to value criteria of the balance transfer loan.
Removal of other person
There might be a situation when a loan structure involves more than 1 or 2 applicants and at any point of time someone out of them is no longer financially responsible for the loan. Balance Transfer give a way to get them off from the loan structure. A co-signer can also be removed whose support is no longer required and wishes to be freed from the liability.