Balance Transfer Loan: All you Need to Know

Repayment of a home loan requires strict financial discipline and planning on the part of the borrower. One way to make repayment easier is to switch to a new lender offering better terms and conditions.

Many banks and NBFCs offer balance transfer loans to attract customers. It allows borrowers to switch their outstanding debt from one bank to another and repay them at low interest. This blog takes readers through all the necessary details about home loan balance transfer.

What is a home loan balance transfer?

Home loan balance transfer or refinancing is a facility that most lenders offer to help borrowers with an existing loan to repay their debt conveniently. Sometimes, it may be tough for an individual to clear his/her repayments due to several factors after a certain period. 

Under such instances, they can look for the scope to switch to a new lender to avail lower interest rates. They can apply for a balance transfer loan with a new lender to repay their ongoing home loan. This will allow the borrower to get better repayment conditions than those offered by his/her previous lender. This includes the flexibility of tenure and lower interest rates. 

When a borrower opts for a home loan balance transfer, the new lender provides the outstanding amount to the old lender. In simple words, he/she closes his/her old loan and avails a new home loan from another lender.

When should one opt for a home loan balance transfer?

It would be wrong to believe that a borrower can opt for a balance transfer loan any time he/she wants to reduce interest rates. Following are a few scenarios when an individual should consider applying for a home loan balance transfer. 

1. When a borrower has a huge outstanding balance

When the outstanding amount is huge, one can opt for a balance transfer loan. However, one must repay at least 6 EMI for their existing loan before he/she can apply for a balance transfer. 

Following this, one can look for new lenders with comparatively lower interest rates and other benefits. Unpaid loans in later months of home loan tenure register just 5-10% of the loan amount. Transferring them can be a futile step as certain extra charges can increase one’s expenses.

2. When one’s existing lender is charging higher interest rates

However, if a borrower finds their current lender charging higher interest rates than other lenders, they can opt for a balance transfer. Even a small decrease in interest rates can lead to a lot of savings due to the high value of home loans. Borrowers can also opt for a top-up facility that is typically offered by many banks and NBFCs with balance transfer loans.

Several banks and NBFCs provide pre-approved loans to long-standing customers. This offer makes the loan application process much quicker than usual for eligible borrowers. To know one’s eligibility for a pre-approved offer, one must visit their lender’s portal and enter basic details like their name and phone number.

3. During the initial years of a housing loan tenure

During the initial years of a home loan tenure, the interest component of an EMI is much higher than its principal component. This means that if a borrower transfers his/her loan to a new lender when most of his/her outstanding EMIs are paid, he/she will have already paid most of the interest. As a result, the borrower will make almost no savings.

This makes it advisable to opt for a balance transfer loan when most of the loan amount is unpaid. 

4. When the overall cost is lower than the savings

Very often, a borrower fails to think it through before applying for a balance transfer. They tend to apply for a balance transfer loan only after comparing the present housing loan interest rates offered by other lenders.

One must consider doing proper research before applying for a balance transfer. This includes checking the new outstanding balance using a home loan calculator. A loan balance transfer also includes additional charges that one must pay along with their monthly obligations. If the additional charges and monthly debt are very high, choosing a balance transfer is not advisable.

How to apply for a home loan balance transfer?

The process of applying for a balance transfer loan is different for every bank and NBFC subject to their policies. However, here are the standard steps that one can follow to transfer their home loan balance to a new lender:

Step 1: Finalising new lender and application to present lender

One must consider doing thorough research on lenders who allow home loan balance transfers. After this, the borrower needs to write an application to their present lender requesting a balance transfer. This application letter must clearly state the borrower’s intention to opt for a home loan balance transfer and his/her reason for the same. 

Step 2: Acquiring a No Objection Certificate (NOC) 

Once a lender accepts one’s request for a home loan balance transfer, they will issue a No Objection Certificate. Borrowers must present this NOC along with other documents to the new lender while applying for a balance transfer loan.

Step 3: Document submission

When applying for a home loan balance transfer online, one must consider keeping all required documents handy before applying. Besides NOC, borrowers require documents for their KYC verification and property documents. They also need to present proof of their income and credit report for the new lender to apply for a new loan. 

Step 4: Final confirmation from the old lender

After the new lender approves one’s home loan balance transfer application, they will repay the outstanding amount to the old lender. Once this process is complete, the old lender will notify a borrower about the closure of the outstanding loan from their end. 

Step 5: Pay any required charges for the balance transfer

After a borrower receives loan closure confirmation, he/she must go ahead paying all required charges to the new lender. This will signify he/she is ready to repay the outstanding debt with a new lender. The new lender will also issue a housing loan contract to the borrower. 

A balance transfer loan is the perfect way to make one’s loan repayment much easier. However, to utilise this facility well, one must make an informed choice. They must wisely choose banks or NBFCs to transfer their home loan based on their interest rates and additional charges.