Balance your liabilities

Balance your liabilities
26 Aug, 2007, 0441 hrs IST,Aman Dhall & Dheeraj Tiwari, TNN

If you thought getting a good deal for a home loan is the end of journey, then you may be missing out on a lot of action. Of course, getting a loan on a competitive interest rate is the first step, but if you’ve made regular payments and created a good credit record, you can use that to your advantage.

For those not in the know, this concept is known as balance transfer (BT), wherein the unpaid portion of your home loan is transferred to a new HFC at a lesser interest rate. We at SundayET find out what to look out for before you decide to go ahead with a BT.

Today, banks (read housing finance companies) are looking out for customers from whom they can benefit in the long run, and if you are looking out for a better deal, it’s not a bad idea to approach a housing finance company (HFC) to refinance your loan on a more economical interest rate. That’s not all. Banks such as ICICI, IDBI and SBI also offer additional benefits such as payment of your pre-payment charges or processing fee.

But there’s a catch here. On the face of it, the picture may look rosy. But if you don’t read between the lines, you can end up in a debt-trap. Take the case of Abhishek Shekhar, a 35-year-old doctor. He took a home loan of Rs 20 lakh at an interest rate of 10% two-years ago from Bank X. The tenure of the loan is 20 years. Now, recently he checked out with Bank Y, and after some negotiations, the latter offered him an interest rate of 8.5%. Now, let’s check out the financial gains of this deal:

On paper, such a calculation looks attractive. But what you need to check out is whether the bank has added the pre-payment amount to your overall loan principal. In fact, some banks hide this clause, thus increasing your loan amount by a considerable sum, plus the effect of compounding interest. Warns Kartik Jhaveri, a certified financial planner and a chartered wealth manager:

“You need to check out what all benefits you may get. The important points you should keep in mind before opting for a BT are — how will the bank handle your pre-payment charges, what other features you’ll get such as mortgage insurance and whether the bank calculates your interest on a monthly or annual basis.”

Jhaveri has a pulse on the problem. In fact, owing to competitive rates across the industry, there are not too many balance transfers happening as of now. Customers are also reluctant to opt for it due to the cumbersome documentation involved and the gains are not too big at the moment. “That’s a major reason why there aren’t any special rebates with reference to processing fees or rate of interest being offered to balance transfer cases. Although we have a facility where we can include the pre-payment charges to the principal outstanding balance, to be paid to the existing bank/ NBFC,” explains Sujan Sinha, senior VP, AXIS Bank.

On their part, the banks are trying to place their offers in a more positive light. “We generally have two kinds of options — ‘Simple Balance Transfer’ and ‘Balance Transfer with Top-up’. In the second option, along with balance transfer, a customer can avail of top-up loan amount based on the vintage of the loan,” says Rahul Mallick, general manager, ICICI Bank. The key levers for making a customer switch from one HFC to another is processing fee and preferential interest rate on balance transfers. “Typically, the new interest rate will be 200 bps lower than the existing loan rate. However, a lot depends on the customer profile and tenure of loan,” he adds.

So before you opt for a balance transfer, it is necessary to check with your housing finance company about the current rates. If you’ve made timely payments, it’s quite possible that the HFC can offer you a better deal. Also, compare that if you go ahead with a BT, will the cost be higher than repayment and switching to another housing finance company. “Balance transfer is not a good move if you’ve only five or less year of repayment left. But otherwise, it is a very easy process,” says Sanjeet Shukla, GM, SBI Personal Banking.

Small steps such as finding out the paperwork required, and if the new bank, will be using the original EMI cheques or fresh ones, can save you from further hassles. Balance transfer need not mean saving money, you can also utilise the same for investing in different options. After all securing a home loan is not the end of journey.