The “Balance Transfer” game!
Let’s talk about “transfers” today. What has been a regular happening in European football and other international team events has now come home in a big way – courtesy the IPL. Players are transferred between teams and they get some serious money as teams bid for individuals and suddenly, as the season starts, you see a player playing against his “erstwhile” team from last season.
Closer home, and in the world of housing finance, “transfers” take on a different meaning. “Balance transfers” as they are commonly called, is in simple layman terms, the switch of a loan from one lender to another one.
So, let’s try and illustrate this with an example. Ms. Shah has taken a loan of Rs. 50 lacs from her bank. The loan is at a fixed rate, repayable over 15 years in monthly installments. She has been paying these installments regularly over the last 3 years. With the general reduction in interest rates, she now hears that another bank is offering to facilitate a balance transfer of the loan at an interest rate that is 0.75% lower than the rate she is currently paying her bank. When she did her “maths” she found she would save approximately 1 lac Rs. over the 12 years left to maturity.
Should she transfer, and what are the various considerations she must run thru in her mind, before arriving at a decision?
There are two ways to come to an answer:
- The quick and easy method – she has more than 5 years of the loan repayment left and has an interest rate drop of 0.75 %. She is saving over Rs 1 lac – just go for it and switch to the lower rate.
- Consider the following aspects before taking a decision:
- Is the new loan at a fixed rate or a variable rate? Does she have the appetite to absorb interest rate changes if the new loan is at a variable rate?
- Does she propose to “run” the loan thru to its balance 12 year life or prepay earlier? Will she get the benefit of the monthly reduction over a reasonable period or will the benefit be only for a short period?
- Are there any fees, costs and penalties, both from the current lender and from the new proposed lender and will those costs offset the reduction in EMI benefit?
- Are there any “hidden” costs with the new lender?
Depending on the answers to these points, Ms. Shah must then decide on whether she should switch the loan or not.
There was a time when you would take a fixed rate loan, pay your EMI’S regularly and sleep safe and well. Life was simpler and less complicated and decision making was easier and there were fewer variables to consider.