Home Loans & Balance Transfer

Why Home Loan Balance Transfer Is a Bad Idea?

Home loan is typically a burden, making us take fatigued decisions based on confusing information on the internet.

Off late, I see an emergence of new breed of companies, promising borrowers options to switch Home Loans from higher to lower interest rate. Saving on an interest rate, the only value proposition of these companies, is not the only point about a Loan. This article tells you why.

In this article, I promise to clear the air around Home Loan Balance transfer as a savings option.

I am making this pledge not based my credentials; An ex-banker for eight years & having managed Home Loan portfolio for an MNC bank, but based on my personal experience in converting an 11.50% Home loan with a Private Indian Bank (synonymous to Home Finance) to 9.45%, without transferring!

Another promise is, the article is a light read and no heavy duty loan jargon, yet offering all insights for becoming a smart borrower!

Base Rate, Margin & BPS:

First things 1st, we need not master these but just develop some perception, just to realize why we falsely accuse banks as “cheaters” for charging existing borrowers higher rate of interest.

Base rate is the minimum rate at which a bank can lend & is often decided basis RBI’s key policy rates (CRR, SLR, Repo, Reverse Repo, etc.,)

The margin is the “Base rate + certain BPS” that banks fix to arrive at Lending rates (PLR/BPLR/etc.,).

BPS is an acronym for Basis Points, e.g., 100 bps = 1% and 25 bps = 0.25%.

Base rate changes from time to time as per RBI’s quarterly monetary policy (did you know? RBI’s Monetary Policy Updates usually come on a Tuesday!). The margin for a particular loan, once fixed, remains so till the loan is fully repaid.

Why existing borrowers end up paying higher RoI than new borrowers?

Banks keep readjusting their portfolio (all live loans) to bridge for defaults, operational cost, the cost of funds, etc., However, to woo a new borrower in a hyper-competitive market, they tend to reduce margins on new loans, creating rate disparity between old & the new.

The main agenda – Why avoid Balance transfer?

This has to be rather seen from two perspectives – of the Bank’s and the Borrower’s.

Bank’s Perspective – 

If you are a borrower with good repayment track record, then answer this simple question: Why would a bank want to lose such a good customer?

The cost of acquiring a new customer is usually @ 1% of the loan amount. Also, in general, banks write-off 2 – 3% of their total portfolio as bad debts.

Given both these burdens & you being a customer (no cost of acquisition) with a clean track record, why would any rational bank let its competitors snatch you away!

Borrower’s Perspective – 

You already underwent the rigour of taking 1 Home Loan, do you want to go through that again?

Also every time you apply for a credit product (loans/credit card), your CIBIL records (Credit Information Bureau) are checked. CIBIL has a clever algorithm that reads such enquiries against you as you being a credit hungry person & hence penalizes you with lower grading!

How I reduced my Home Loan Interest rate by 2.05%, without doing a Balance Transfer:

The magic pill – 

“Repricing”; a one-time fee charged for resetting your loan to prevailing market rates. In my case, I was charged a fee of Rs.1500/- and the rates changed from 11.50 to 9.45%! In the event of a balance transfer, the new lender would charge 1 – 2% processing fee, which could be much greater in value than Rs.1500/-!

Auto Repricing to all customers – 

Remember, banks are in a business and businesses are for profits! If the entire Loan portfolio is repriced, then what happens to the bank’s profitability? So this is never going to happen. Nevertheless, being a responsible borrower, it’s your duty to stay abreast of options you can avail and benefit!

Having reached this stage of the article, you now hold an essential information in your hand. So, simply call your bank’s customer support & get your loan repriced, with no hassle whatsoever.

Balance Transfer still an option – 

If you are super dissatisfied with your bank’s service, repricing is unavailable, post repricing you are still above the prevailing rates, any other pertinent issue.

Last word – 

A long-standing relationship with a bank is not merely about 1 or 2 % lower interest rate; it is a stable financial partnership based road map that you craft for your future! So don’t succumb to unnecessary temptations you find on the internet!

God speed freedom from loan repayment for you!

If you have any comments on my views, I would love to hear them.