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6 Points to consider before transferring the home loan to another bank

Posted on 14 Nov 2022

The home loan makes it easy for an individual to fulfil the dream of owning a home.

Today it's not that difficult to opt for a home loan, you can easily approach any bank to fund you for buying a property, of course after meeting the requirements.

Indeed home loans come with benefits like liquidity, tax exemption etc; yet we cannot ignore that home loans are long-tenure loans which go up to 20-30 years. During these years along with the repayment of principal, we also have to pay the interest amount.

Now that we are talking about interest, we all know that different banks or NBFCs offer different interest rates. And thanks to the flexibility of our banking structure that the borrowers think they are paying high interest and EMI (Equal Monthly Installments) to their current bank, they can consider transferring their home loan to another bank.

However, often borrowers think that the decision of transferring the home loan evolves only around the rate of interest, but this is not how it works. There are many other factors that the borrower must consider before transferring the home loans which are explained as follow:

  • Calculate the total outgo interest amount - Before finalizing your decision, calculate the total amount of interest you have to pay throughout the tenure of the loan. Don't run for the low EMIs, because if you are going to avail the loan for a longer tenure you will pay more amount to the bank in form of interest. But, in case if the tenure is the same and you are still paying higher EMIs then you should certainly change your lender. Also, if your financial condition is sound try to pay higher EMI to finish the loan early as it will help in paying less amount as loan interest.

  • Determine your credit score - When it comes to a loan, a credit score is a crucial factor. While transferring the loan your credit score determines if you are eligible to transfer the loan or not. A new lender will always look for the credit score along with other factors to determine your creditworthiness. If you have been irregular in paying the EMIs and credit card bills you will be less or not eligible for the transfer. Therefore ascertain to pay all your credit card bills, EMIs on time to assure a high credit score.

  • Consider additional charges - Transferring process comes with a cost that you are required to pay such as processing fee for the new loan, legal charges, valuation fee, technical charges stamp duty, and other additional charges that your new lender will charge. All these charges sometimes overcome the benefits of lower interest rates, so compared the costs with the benefit in terms of reduced interest rates. Besides, multiple banks charge this amount in different ways like some banks charged based on the profession while some keep it uniform for all etc. You can also try negotiating this cost but only if your credit score is good.

  • Focus on collateral to the outstanding ratio of the loan - It is not the rational decision to hand the original collateral to your new lender, in case you have already repaid the huge amount of loan to your existing lender for more than 8-9 years. The reason being that the original collateral has much more value than the remaining amount, so why to give security which is double the amount of your loan outstanding? In such a case, offer your new bank a lesser amount of collateral and if they don't agree, then ask them to lower the interest rate more.

  • Don't transfer if the tenure is of 5 or less than years - If the tenure of your home loan is going to end within the 5 years, then it is not a wise decision in an economic sense to transfer the home loan. Owing to the reason, that you have to bear the loan processing cost and other miscellaneous charges once again when you switch lenders and also you would have already paid the higher interest portion to the lender. Experts believe a person should get a home loan switched if they are in the initial 4-5 years of the loan as it is much beneficial since the interest rate is higher initially.

  • Go through the terms and conditions carefully - Last but not least, before you continue with the transferring process, read the terms and conditions of the new lender carefully. Make sure that the new bank/NBFCs isn't forcing another product along with the loan and ascertain that they do not offer insurance without your knowledge. Make sure you are aware of what the new bank has to offer in terms of loan benefits, top-ups etc.

Final thoughts
Transferring of loan is not that difficult but that doesn't mean to remain completely oblivious. Before you conclude to transfer, try to negotiate the interest rate with your current lender (if that is the only reason) if they are ready to negotiate then halt your decision and if not then carry on.  Don't let the low-interest rate and other offers entice you, check all the terms and conditions, go through the above points and then make your decision.

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