So, if you are one of those, you better mull two options balance transfer and prepayment of a home loan. These options, albeit different to each other, can yield massive savings in the form of reduced EMI and a lower outflow of interest. So, let’s understand these home loan options in detail.
Home Loan Balance Transfer – What Does it Mean?
It means the home loan balance transfer of an outstanding home loan balance from one lender to another. Suppose you are running a home loan account somewhere at an interest rate higher than what’s offered elsewhere, a balance transfer can be a messiah by saving a huge chunk of interest repayment. Particularly, the time when the difference between the interest rates is 1% or more.
How to Make a Balance Transfer?
Firstly, as pointed out above, look for the difference in interest rates before making efforts to transfer your outstanding balance. On finding a reasonably higher difference, you then need to first submit an application to your current lender letting it know your intent to transfer the remaining balance to another lender, which could be a bank or a non-banking finance company (NBFC). Subsequently, the existing lender would send a No Objection Certificate (NOC) or consent letter, as well as a statement showing all the outstanding loan dues. Then, the onus lies on you to submit all these documents to the new lender where you want your remaining balance to be serviced.
The new lender would then issue a banker’s cheque to the existing lender to get the loan closed at the latter. And from there on, you will service the remaining home loan with a new lender. The new lender will make a few more checks before approving the transaction. These include your repayment track, credit history, technical and legal verification of the property. Only when it is satisfied on these fronts does the transaction go through.
How Much Can You Save on Balance Transfer?
The answer to the same can be best known by taking a look at the below example.
Example – You are servicing a 20-year home loan of ₹35 lakhs at an interest rate of 9.50% p.a. It’s been 3 years that you have been servicing a debt. During these years, you have been paying an EMI of ₹32,625. If you continue the loan here for the entire 20 years, you will end up paying a total interest of ₹43,29,902. As of now, you have paid an interest that totals to ₹9,70,628, with the total outstanding remaining to be ₹32,96,143.
If you find a lender that’s offering you the balance transfer facility at 8.40% interest rate, the EMI would appear as ₹30,399. The interest repayment over the next 17 years is likely to be ₹29,05,164, which when added to the interest you have already paid with the existing lender comes as ₹38,75,792. Deducting this from the interest amount that you will end up paying to the existing lender over 20 years will give a sum of ₹4,54,110. Now, this is the saving you can realize while switching your home loan to the new lender.
What is Home Loan Prepayment All About?
The prepayment of a loan means closing the debt before the expiry of its tenure. To close the loan, you must have a big bucket of funds, right? How can you ensure that? Well, systematic investment in products like mutual funds can help achieve that.
Taking a cue from the above example wherein you were seen servicing a home loan of ₹35 lakhs for a period of 20 years, the outstanding balance at the end of the 12th year would be about ₹14,85,148. In that case, you can invest ₹4,500 monthly in mutual fund SIP to accumulate a surplus of around ₹14.5 lakh by 12 years time, almost equal to the amount which would be the case by the 12th year of a home loan.
An SIP is a disciplined mode of investing in mutual funds monthly, quarterly, half-yearly or even annually. The choice rests with you as far as choosing a frequency is concerned. However, the monthly option seems fit in most case as it can instill far more investment discipline than the other frequency options.