Paying higher interest rates on your home loans can be tough. Besides being charged higher interest rates by the lender, sometimes the terms and conditions do not suit the interests of the borrower. In that case, borrowers opt to transfer their balance from their current lender to a new one. The new lender might be charging a low rate of interest. Or you might be getting a longer tenure, or maybe the terms and conditions are better. The term used for switching lenders in search of better opportunities is called a home loan balance transfer.
A home loan balance transfer is a way to maximise your loan affordability and get better service terms. The Reserve Bank of India regulates this facility by issuing necessary guidelines from time to time to deliver more benefits to the borrowers.
What is a Home Loan Balance Transfer, and Why is it Done?
A home loan balance transfer is a process through which you can change your current lender. If you are unsatisfied with the current terms and conditions or the interest rate, you can search for a new lender. It will give you access to better terms and conditions and a lower rate of interest.
You can close the loan account of the previous lender after paying the due installment and any penalties. From the next month, you can start repaying your interest to the new lender following your home loan balance transfer.
What are the Home Loan Balance Transfer Guidelines of the RBI?
The RBI issued several policies to help borrowers finance their high home loan balance transfer interest rates with more affordable options. If the borrower defaults on the current loan, he or she may pay without penalty because of the fluctuating interest rates. Banks’ fees to switch your balance are about 1–3%.
Who is Eligible for Home Loan Balance Transfer?
People paying a higher rate of interest towards a bank loan that offers a lower rate can opt for this. The new lender will pay off the unpaid loan by giving the remainder to the old lender. It is vital to compare the interest rates when going for this.
Important points to know
To create a uniform code of loan processing, the RBI has established specific rules for loans against property and home loan balance transfer that all financial institutions should observe. For instance, the most up-to-date RBI guidelines state that pre-payment or partial repayment of LAP loans purchased with variable interest rates for non-business purposes incur no costs.
What are the documents required for a home loan balance transfer?
According to the RBI, the following is a list of documents that you must submit for a home loan balance transfer:
- Aadhar Card, Latest Electricity/Gas Bill, and Ration Card.
- Property Tax/Water Bill, Co-Applicant Guarantor-KYC Documents, Employee Cards, Voter IDs, Driver’s Licenses, and Passports.
- Salaried Individuals’ Six Months’ Worth of Proof of Income The last three months of bank statements showing salary deposited. Your last two years’ W-2s and Form 16s.
- Information Technology tax filings for the last two years and statements from the principal bank account.
- CA-audited financials covering the most recent six months are all required of self-employed individuals.
What are the benefits of a home loan balance transfer?
Here are some of the benefits of a home loan balance transfer:
- Low rate of interest:
The primary reason for transferring your balance to a new lender is the lower interest rate you will be charged. The interest rates are going to be much lower than what your previous lender used to charge.
- Extended tenure of repayment:
The repayment tenure significantly increases in a home loan balance transfer, giving you ample time to plan your finances and repay the loan with utmost convenience. The tenure can be as long as 20 years, which can even be extended to 30 years in most cases.
- Better terms and conditions:
The new lender might provide you with better terms and conditions, including zero to minimal processing fees, no extra charges, lesser penalties, etc.
- High flexibility:
Besides that, the new lender might provide you with enough flexibility to make your loan-related decisions and tailor your home loan credentials. For example, the option to choose between monthly installments and quarterly investments.
- No foreclosure charges:
Banks don’t charge you any pre-payment fees or foreclosure fees in case of a home loan balance transfer. Under the new RBI guidelines, if you foreclose the account before its term, you won’t be charged any extra fees for the pre-payment. However, earlier, prepayment fees from lenders averaged about 2–5% of the loan balance.
When the current lender doesn’t meet your conditions, charges you a higher rate of interest, and doesn’t allow you enough flexibility, it is time for you to look for a home loan balance transfer. To protect yourself from being taken advantage of by your lender, it is in your best interest to become well-versed in all of the rules and regulations related to a home loan balance transfer issued by the Reserve Bank of India.
If you’re willing to learn more about RBI’s guidelines regarding home loan balance transfer, consider consulting with an expert at Piramal Finance.