Home Loan Transfer (also known as Refinancing or Balance Transfer or Loan Transfer) is a facility offered to transfer the outstanding principal balance of the loan availed from other banks/ financial institutions for more favorable terms & conditions. Balance Transfer is a common practice in the Loan industry where a customer transfers his outstanding principal loan amount to another bank or financial institute. Home Loan balance transfer is done primarily for a better rate of interest and also better features. Balance Transfer can also increase the loan amount through a Top-Up Loan.
A home loan transfer can benefit you only in certain conditions; even if a bank offers lower interest rate it may not be economically viable to transfer a home loan if the savings are not enough to justify the time, efforts and cost. The following factors contribute to the decision-making when considering whether to transfer a home loan or not:
Total cost Remaining loan tenure Outstanding principal Time and effort
There is a cost involved in making a home loan balance transfer. When you transfer a home loan the cost involved includes the processing fees (charged by the bank taking over the loan), pre-payment penalty (may or may not be charged by the existing lender) and some charges like stamp duty etc. While pre-payment penalty is generally waived off by most banks as NHB and RBI discourage banks from charging it but other charges are unavoidable. Total savings can be determined after considering the total cost involved.
Remaining loan tenure is also a crucial factor; if there is less time left in completion of the loan tenure then it might not be worth making the effort for a home loan transfer. If the remaining loan duration is long then the cost will be amortized over the remaining loan duration else the cost burden will not be justified. Again a bigger principal amount outstanding makes more sense when transferring a home loan because a bigger unpaid amount translates into more savings. The thumb rule to calculate benefit of a balance transfer is a reduction of 100 basis points if tenure left is less than five years, 75 basis points if around 10 years left and 25-50 basis points if 15 - 20 years left.
Why Balance Transfer or Refinance your Loan?
Balance transfer of a loan happens when the entire unpaid principal loan amount is transferred to another bank for a lower rate of interest. The bank that had originally extended the loan to you gets the unpaid amount and you have to, in turn, now pay your EMIs at the new rate to the bank that has taken up the loan. Almost every bank in the country has a facility for a balance transfer of home loans and if you have been paying your EMIs regularly, there is often no problem associated with it. The primary reasons for the Balance transfer of loans are :
Higher Rate of Interest: A home loan transfer helps the customer avoid high applicable interest rates by existing bank and migrate to a lower interest rate with another bank.
Existing Bank does not agree to change loan terms: Loan balance transfer is an option in case your bank doesn’t agree to re-negotiate certain terms and conditions of your loan agreement. As an example, If customer wish to reduce the loan EMI;s by increasing the tenure but the existing bank doesn’t agree to this. In this case one should move the loan to bank which offers higher tenure.
Top-up loan: When a home loan for the first time, it is based on the home loan eligibility up to which bank can lend. If your entire loan amount is disbursed, then you are not eligible to get any further loan immediately, but over the years when you have paid back some part of your loan and if your income has also increased, then it may happen that your loan eligibility has gone up. At that point, you are eligible to take up a top-up loan which is over and above your existing home loan. A top-up loan is an additional amount that you can borrow from your bank if you are an existing home loan borrower. If your lender is not open to finance this you might opt for a new lender.
Due to a high disparity between interest rates for existing and new customers, several home loan customers are unhappy with the high rates they are being forced to pay. But when banks start discriminating between you and its new customers, it’s time for you to transfer your home loan to a lower interest rate and save money!
Cost Benefit Analysis of Loan Transfer
1. Before transferring your home loan a thorough cost benefit analysis needs to be done. For balance transfer of loan customer needs to pay applicable costs which include processing fee, stamp duty and other documentation charges. If the customers tends to spend too much in the process of the home loan balance transfer, then it is not advisable.
2. Balance transfer will depend on the difference between the interest rates offered by the two banks, the amount of the loan left unpaid and the tenure remaining. If the unpaid amount is low or if only a few years remain in terms of tenure, balance transfer may not be ideal. This is also because banks often levy a processing fee for balance transfer and in the end it may not be all that beneficial.
3. If home loan is on a fixed interest rate, then customer will have to pay a pre-payment penalty to transfer your loan. In this situation it is not advisable to transfer your home loan.
4. But if you have a high floating interest rate, then transferring your loan to a lower interest rate will be beneficial.
5. If you have a home loan with long repayment tenure, then transferring will benefit you, as a longer time-period implies higher benefit. The thumb rule to calculate benefit of a balance transfer is a reduction of 100 basis points if tenure left is less than five years, 75 basis points if around 10 years left and 25-50 basis points if 15 - 20 years left.
Get loan details, foreclosure letter and list of documents from existing Bank
ubmit a letter to the existing bank requesting a loan transfer. The letter should request for the NOC (No objection certificate) , foreclosure letter, Statement of account of your loan and list of documents. Based on your request, the bank will give a consent letter / NOC, list of documents and a statement mentioning the outstanding amount. All these documents need to be given to the new bank, who then sanctions your loan amount to the old lender for an account closure.
This step may take 1 – 3 weeks, varying from bank to bank. At this stage, your current Bank will try to retain you by offering to slash the interest rate. It is best to take this offer and get a counter offer from another bank, with a little more effort.
Application to New Bank
After you have selected new bank, you have to fill in the application form wherein the lender requires complete information about your financial assets & liabilities; other personal & professional details together with the property details & its costs. The Bank you are moving on will treat your home loan as fresh and you have to follow all the procedures again. It will include your credit appraisals, legal verification of your property credentials and also the technical evaluation by the new bank, etc. You are required to submit the necessary documents to the bank which will be verified together with the details in the application.
Credit & default check
Bank checks out the borrower's loan eligibility (through repayment capacity) & the amount of loan is confirmed. The borrower's repayment capacity is reached which is based on the income, salary, age, experience & nature of business etc. Bank also checks credit history through the CIBIL Score which plays a critical role in deciding & approving your loan application. Low Credit Score implies that the bank upfront rejects your application on the basis of earlier credit defaults; on the other hand high credit score gives a green signal to your application.
Legal and Technical Assessment of the Property
Technical Assessment: A qualified technical officer will conduct a valuation on the property that will be used as security.
Legal Assessment: A qualified lawyer will examine the property documents i.e. chain of agreements, title deeds etc to determine if the property documents provided by you are conducive for lending. This is to ensure that the property is clear, marketable and free from any debts and encumbrances.
Based on the technical and legal assessment report, we will determine if the property is suitable for mortgage lending purposes.
Bank sanctions Loan & Offer letter to the borrower:After the credit appraisal of the borrower bank decides the final amount & sanctions the loan, the bank further sends an offer letter to the borrower which constitutes the details like rate of interest, loan tenure & repayment options etc. Once you get a credit approval from the new bank, it’s time to make the final decision to transfer the loan.
Loan Disbursal and Handing over payment to the existing bank
Some banks insist on a prior notice before you can prepay your home loan. Check your loan agreement carefully and ensure that due notice is given to or waived by your existing bank. The cheque is made in the favor of your existing bank and is handed over to the existing bank. Your existing bank may typically take 10-20 days to handover property documents to the new bank.
The documents required for processing home loan application are almost similar across all the banks and financial institutes; Some banks and financial institutes might have slightly different requirements.
Following documents are required for processing of home loan. The types of documents varies across the financial profile of the person.
Banks and financial institutes require Self Attested copies of Documents.
The Signed application form duly filled with photograph ID/ Age Proof - PAN Card/ Passport/ Aadhar Card and Residence Proof – Passport/ Utility bills/ Bank Statements. Cheque of Processing Fee
Last 2 years Form 16 or Income Tax Returns Last 3 months salary slips Last 6 months bank statement reflecting salary credits Existing Loans’ sanction letter with repayment tracks
Self employed Individual/ Proprietorship
Proof of Business- Shop and Establishment Certificate/Vat Registration Certificate/ Service Tax Certificate Last 3 years IT tax returns with profit and loss account and balance sheet duly audited by CA Latest 12 months bank statement- Savings Account and Current Account Existing Loans’ Sanction letters accompanied with repayment track Business profile on the letterhead of the company
Partnership Firm/ Partnership LLP
Age proof of all the partners in the form of PAN Card, Passport or Adar Card PAN Card of the company Residence proof of all the partners –Utility Bills/ Passport/Bank statement/ Registered rent agreement Proof of Business- Shop and Establishment Certificate/Vat Registration Certificate/ Service Tax Certificatev Latest 3 years Income Tax returns with profit and loss and balance sheet duly audited by CA. Latest 12 months bank statement of the Company and of the Partners’ Savings Bank Account Partnership deed Existing Loans’ Sanction letters accompanied with repayment track Business profile on the letterhead of the company
Private Limited / Limited Company
Application form duly filled with photographs of directors. Age Proof of Directors- PAN Card, Aadhar Card, passport Residence Proof of Directors- Utility Bills/ Passport/Bank statement/ Registered rent agreement PAN Card of Company Education Qualification- A professional qualification certificate in case of Doctors/CA/Architects Proof of Business- Shop and Establishment Certificate/Vat Registration Certificate/ Service Tax Certificate MOA, AOA, List Of Directors, Share Holding Pattern of the Company certified by CA Last 3 years IT returns with Profit and Loss account and balance sheet duly audited by CA. Latest 12 months bank statement of Company of all current accounts and the same for Director’s Savings Bank Account Existing Loans’ sanction letter with repayment track of company and Individual Directors Business Profile on the Letter Head of the Company
Occupancy Certificate Approved Plan of building Chain of deeds in case of resale property Nil Encumbrance Certificate- EC ( if applicable) Copy of Sale Agreement / Draft Sale Agreement Copy of Stamp Duty Receipt Copy of Registration Receipt Copy of Building Sanction Plans Copy of Chain of Agreements (if any) Copy of Share Certificate (if Society formed) Copy of Payments Receipts made towards the Property Copy of Allotment Letter from Builder (if allotted)
Additional Documents required for Loan Transfer
foreclosure letter your payment history and list of your documents that the bank has
Indians with a regular source of income, which includes salaried individuals, self-employed professionals, self-employed business people, NRI individuals and existing property owners who can pledge it as security for the loan, are all eligible for a home loan.
A lender needs to be sure that you are capable of making repayments on your loan. The lender before giving a home loan will take a thorough look at your income statements, your assets and liabilities, your credit history to see how you handle repayments on credit cards and other existing loans, your education and work experience to see how qualified you are to meet your professional and financial goals and whether you can really afford a large debt burden like a home loan. There are numerous factors that banks take into consideration when computing home loan eligibility. The important one’s are:
Age of the applicant - The age of the applicant matters as paying a home loan is a long term commitment. And banks have to ascertain how long you can pay off the EMI. A person in his 30’s can pay the loan for next 30 years, but a person who is 50 years old will retire at 60 and has just 10 years in hand and in that case, he can get a loan for lower amount compared to more younger person.
Credit History: Your past credit history and repayment record has direct impact on your loan eligibility. If someone has a bad repayment record, then he/she might not get the loan itself. But in some cases where bank considers the application it might happen that they only approve a certain percentage of the eligibility
Profession, and continuity of your employment.Some professions are categorized as negative or risky by the lenders. People in such professions may find it difficult to get a loan sanctioned. On the contrary, some jobs are considered more stable with lesser probability of default. They are on the preferred list of most lenders.
Current obligations i.e. the other Installments ( EMIs) one is currently paying, the number of credit cards and credit limits one have or use,
Property Being Purchased : iThe lending bank or institution will also consider which property one is buying. In the event it is a property under construction by a developer, the credibility of the developer and past performance on their projects will also determine how much the lender is willing to lend against such a property.
Current Income, Savings: The standard method used to assess your home loan eligibility is the application of FOIR (fixed obligation to income ratio). This is an important calculation for the bank for this is the way to understand what your other obligations are as a borrower. To calculate the FOIR the lender takes into consideration all the other monthly installments a borrower is paying including the home loan that he has applied for. However, the statutory deductions from your salary like provident fund, insurance premium payments are not taken into consideration in this calculation. There are some lenders who assess the eligibility of a borrower on the Gross salary where by the statutory deductions are taken into consideration.
As a thumb rule, banks will lend to applicants who can set aside 40% to 65% of their monthly income towards their home loan repayments. Based on this, an individual’s loan eligibility is calculated. It is assumed that a person who earns more can set aside more money towards his EMI repayments. In other words, it means that if one needs around 50% of his income to meet his personal expenses, the other half is committed towards fulfilling his fixed obligations including the home loan.
If one has additional income like Incentives, Overtime, LTA, Medical Reimbursements, Car Allowance etc. then it is averaged out to per month’s income & only 25% to 50% of the same is considered for eligibility. If you have any ongoing obligation then it is deducted from the appraised income, this amount is then divided by EMI per lacs for the considered term, and the arrived figure is the eligibility in lacs.
Example shown below
Net Salary pm after tax deduction = 80,000/- Averaged out incentive pm = 20,000/- Averaged out LTA pm = 2,000/- Current Personal Loan EMI = 5,500/-
Loan Calculation based on the above information:
50% of Net salary = 40,000/- 25% of Incentive = 5,000/- 25% of LTA = 500/- Appraised Income = 45,500/- Appraised Income [-] less] ongoing EMI = Final Income to be considered.45,500 [-] 5,500 = 40,000/- Suppose the loan is @ 10% for 20 years; then EMI per lac @ 10% for 20 years is Rs.965/- The eligibility would be Final Income / EMI per lac for the tenor.40,000 / 965 = 41.45 lacs Hence, the eligibility is Rs. 41.45 lacs @ 10% for 20 years Every banks has its own method for calculating eligibility. It is advisable to check the eligibility with the concerned person. The simplest way to increase your loan eligibility is by increasing the loan tenure. But the loan tenure is directly dependent on the age of the applicant. As the age increases the borrowing capacity decreases. Applying jointly, with your parent or spouse, increases loan eligibility.