Is a home loan balance transfer worth it? Do this sum first

Home loans last long enough for the market to change around you. You took yours when rates were high. Now a bank is advertising a lower rate, and your inbox is full of “transfer your loan and save lakhs” messages. Some of those offers are good. Some save much less than they promise, because moving a loan has costs the adverts don’t mention.

The way to tell the difference is a short piece of arithmetic. This guide shows you how to do it, when switching tends to make sense, and what else to try first.

What a balance transfer is

In a balance transfer, a new lender pays off what you still owe to your current lender, and from then on you repay the new lender instead, usually at a lower rate. Your property papers move with the loan. Nothing changes about your home: you are only changing who you owe, and on what terms.

What switching costs

• Processing fee at the new lender. A percentage of the loan amount, plus GST. It varies widely, and some lenders waive or reduce it for transfers, so ask.
• Legal and valuation charges. The new lender checks your property papers again and values the property.
• Stamp duty and mortgage charges. A fresh mortgage document is signed, and the charges depend on your state.
• Closure charge at the old lender. On floating-rate home loans to individuals, the old lender can’t charge you a prepayment or closure fee under RBI rules. If your loan is fixed-rate, check the agreement.
• Time and paperwork. Documents are checked again, and the transfer takes a few weeks.

Together these often run to tens of thousands of rupees on a large loan, and can be more. In the examples below, we assume a total of ₹40,000. Replace it with the real quotes you get.

The break-even sum

Here is the whole method in three steps.

1. 1Work out your EMI today, and the EMI at the new rate, for the same balance and the same remaining months. The difference is your monthly saving.
2. 2Add up every one-time cost of moving.
3. 3Divide the costs by the monthly saving. The answer is the number of months before the switch has paid for itself.

Three examples

All three are for a home loan with ₹40 lakh outstanding, at a current rate of 9.5% a year, and costs of ₹40,000 to switch.

In the first case, a gap of three quarters of a point with 15 years to go repays the costs in about two years, and leaves you ₹2,82,387 better off by the end. In the second, a gap of a quarter point saves ₹601 a month, so it takes more than five years to cover the costs. It still ends ahead on paper, but only if you stay put that long. In the third, the gap is the same as the first, but with just 5 years left there is little time for the saving to add up.

When switching tends to make sense

• The new rate is lower by a margin you can feel. A gap of half a point or more is generally worth working out; much less is rarely worth the effort.
• You are early in the loan, with many years left, so the saving has time to add up.
• Your credit score and income are better than when you first borrowed, so you now qualify for sharper offers.
• The break-even month is comfortably inside the time you expect to keep the loan.

When to skip it

• Only a few years remain on the loan.
• The rate gap is small, or only applies for a teaser period and then resets.
• You plan to sell the property or repay in full soon.
• The new lender’s offer needs you to stretch the tenure, which can cost more in the end.

Try this before you move

Ask your current lender for a lower rate. Many lenders will reduce the rate on an existing floating-rate loan for a good customer to keep it, often for a small conversion fee or none at all. That costs a lot less than a full transfer. Bring the best offer you have from another lender, and a clean repayment record. If the answer is no, you still have your outside offer.

Read the fine print on the new offer

• What the rate is tied to. Floating-rate loans follow a benchmark plus a spread. Ask what the spread is, and whether it can change after the first year.
• Tenure. Keep it the same or shorter. A longer tenure lowers the EMI and quietly raises the total interest.
• Top-up. A top-up loan on a transferred home loan can be handy, but it increases what you owe. Take only what you need.
• Insurance. If the lender attaches a loan insurance plan, ask the cost and whether it is optional.
• The key facts statement. Read the all-in yearly cost, the APR, and the repayment schedule before you sign.

What happens to your tax benefit

If you claim home loan tax benefits under the old regime, they continue as before. You claim interest and principal paid on the new loan, within the same limits. Keep the certificates from both lenders for the year you move, since each will show part of the year’s payments.

How the transfer works, step by step

1. 1Collect your loan statement and a foreclosure statement from your current lender.
2. 2Compare offers from two or three lenders, on the all-in cost.
3. 3Apply to the lender you pick. It checks your income, credit score and property.
4. 4Receive the sanction letter, and sign the documents.
5. 5The new lender pays your old lender, and you collect your original property papers from them to hand over.
6. 6Check that the old loan is closed, collect the no-dues letter, and update your records.

The bottom line

A balance transfer is worth it when the saving is clearly bigger than the cost, and you will stay with the loan long enough to collect it. Do the break-even sum with real quotes, ask your current lender to match first, and don’t stretch the tenure. If you want to see what your own numbers look like, we can compare lenders for your loan before you decide.