A home loan is one of the ways for you to acquire the elusive home of your dreams. A home loan comes with its own set of pros and cons and you need to evaluate them carefully before you commit to the home loan because typically the home loan is a long drawn affair sometimes running for 30 long years. This means you have to commit your EMI for 360 months. The factors among the many that impact your home loan most are
You are aware that the RBI decides on interest rates in its bi-monthly policy review. Whenever the interest rate decreases, it helps you if you have a home loan with a floating rate of interest as the new home loan interest rates are applicable on the current outstanding balance in your home loan account.
On the other hand, if your home loan is on the fixed interest rate, then you lose out because the new interest rate is not applicable to you. In such instances, you could consider home loan transfer to another lender where the interest rate is lower.
For instance, if you have taken a home loan of Rs. 30 lakh at 9% fixed interest rate for the tenure of 360 months, the EMI would be Rs. 24,139 (using the IDFC FIRST Bank EMI calculator). After running for 10 years, your outstanding principal amount is Rs. 26,82,892. At this juncture, the interest rate goes down to 8.75%. Since you are on the fixed rate, you cannot change over to the new home loan interest rate and your current EMI will continue for another 20 years. But, there is an opportunity to transfer home loan balance to another lender at the new interest rate.
Let’s see how much you will benefit if you opt for home loan transfer. Let’s assume that there are no prepayment charges and you don’t lose any tax benefits because of the transfer.
By using the IDFC FIRST Bank EMI calculator, you can arrive at the new EMI for the outstanding balance of Rs. 26,82,892 for 20 years tenure which works out to Rs. 23,709. The savings you will make will be Rs. 103,200 over the 240 balance months. Thus, you can see that you will benefit substantially by exercising the home loan transfer option to another lender. Your benefit would be much higher if the interest falls by more than 0.25%.
Typically, you transfer home loan when there is still a long way to complete the tenure. When transfer home loan you must also consider whether the effort is worth it because there is every possibility that home loan interest rates may go up in the future. In such an event, it may not make sense to do home loan transfer to another lender. However, there is still the opportunity to review your home loan based on the set of circumstances that you are in at the time of decrease in home loan interest rates. For instance, you could have started to earn more because of a promotion and you are able to afford a higher EMI in which case you can reduce the tenure and overall pay lesser interest than you would with a longer tenure.
All in all, there is the option of home loan transfer and you should capitalize on that option because the competition is severe and lenders would entice you with good offers. You must strike a hard bargain and you will benefit more.