How does a home loan balance transfer work?

You may be in a situation where out of dire need you took a home loan from a bank at a relatively higher rate. There can be numerous reasons other than the urgency of the loan; for instance documentation may not meet the lender’s norms.

Now after you have made a reasonable amount of repayment and maintained a good track record, you might get an offer from another institution regarding the balance. In such a situation, you may be better off transferring the remaining balance to a new bank offering a relatively lower rate. This is what a home loan balance transfer is and helps the borrower in servicing the total debt at a comparatively lower rate of interest, and hence total interest outgo.

Once you have found a new lender who is ready to finance your loan at a lower rate, you need to complete the below steps:

1. Request your current banker: You need to first approach your current banker and ask for the home loan balance transfer.
2. Obtain no-objection certificate (NOC): Herein your lender, will hand over the no-objection certificate, together with the foreclosure statement and the home loan balance amount.
3. Apply to the new lender: Go to the new lender, submit KYC documents as well as other home loan documents including property documents etc.
4. New lender repays to the old: The new institution pays the outstanding balance to the previous institution either directly or by way of bank draft, cheque etc.
5. Home loan gets transferred: Home loan is now transferred to the new borrower and you now start repaying for the new loan as per the pre-specified terms and conditions.

Home loan balance transfer can be opted for under one of the following circumstances:

Even if the rates are being reduced by some 50 bps and you have a long tenure to go, then in such a situation you can substantially lower your interest outgo over time.

Also, if a substantial EMI is still outstanding, it may be a better choice to make a transfer to a low-interest institution.

If you have faced hassles with your current banker, it may be a good idea to shift to a new financial entity.

How much can you save if you transfer ₹50 lakh loan for a 1% lower rate?

The rate cut of even 1% can lower your total outgo as interest substantially, here is a calculation showing the same:

With the transfer, you save over ₹8.1 lakh in this example.

There can be situations when you should avoid taking a home loan balance transfer route such as when the remaining loan tenure or principal outstanding is less, when the penalty or foreclosure being charged is heavy or substantially higher than the probable interest savings.