Balance transfer: The new face of home loans

Falling interest rates and availability of cheaper housing finance have proven to be the proverbial "dream come true" for those planning to take home loans. However, there is another aspect to this story that has been largely overlooked. It is applicable to those who have already availed of home loans at higher rates in the past.

Balance transfer- a facility which enables you to transfer the unpaid portion of your home loan to a new home loan company at a more competitive (read cheaper) interest rate. Let us take an example to better understand this concept. Say Mr. X took a home loan of Rs. 1,000,000/- in January 2001 for a 15-year tenure at the then prevailing interest rate. Banks A, B and C offered loans at 12.5%, 13.5% and 14.5% respectively. The processing fees were paid at 1.5% of the loan amount. Table 1 shows the EMIs payable in each of the above scenarios.

The 2001 home loan scenario.

	Loan Amount (Rs)	Interest Rates (%)	Tenure (years)	EMI (Rs)	Processing fee (Rs)	Total Payable Amt (Rs)
Bank A	1,000,000	12.50	15	12,326	15,000	2,233,680
Bank B	1,000,000	13.50	15	12,984	15,000	2,352,120
Bank C	1,000,000	14.50	15	13,656	15,000	2,473,080

Interest rates as on January 2001,
180 EMI instalments

Now in September 2003, Mr. X is informed about the balance transfer facility. Assuming that he can avail of this facility at the rate of 8.75% (a rate offered by banks like IDBI bank), what are the costs involved in transferring the balance to a new bank? Mr. A will have to pay a maximum penalty to his previous financer at the rate of 2.0% on the unpaid balance in his loan account. Also he will be required to pay a processing fee to his new financer (say Bank Z) at 1.0%, and undergo a credit check for his new financer.

Balance transfer

Balance Loan Amt	Interest rates (%)	Processing fee (BT) (Rs)	EMI (new) (Rs)	Penalty (Rs)	Total 1 (Rs)
927,927	8.75	9,279	9,275	18,559	1,697,338
933,653	8.75	9,337	9,332	18,673	1,707,770
939,003	8.75	9,390	9,385	18,780	1,717,470

Interest rates as on August 2003,
180 EMI instalments

Since Mr. X has already paid 32 instalments on his previous loan along with the earlier processing fee, they should be treated as costs as well. As a result the total costs for the Balance transfer to Bank Z will be as follows.

Sunk cost

	EMI instalments paid (Rs)	Processing fee (Rs)	Total 2	Grand Total (1+2) (Rs)
Bank A	394,432	15,000	409,432	2,106,770
Bank B	415,488	15,000	430,488	2,138,258
Bank C	436,992	15,000	451,992	2,169,462

The results are substantial to say the least. There is a further possibility to inflate the savings. If Mr. X decides to invest his savings from the EMI differential on a monthly basis, the interest earnings on this investment will prove to be an additional source of savings.

Savings

	Amt (Rs)
Bank A	126,910
Bank B	213,862
Bank C	303,618

The benefit derived from opting for a balance transfer will be a function of the earlier interest rates and the present one. However the fact remains that balance transfer is one option the loan seeker can ill afford to ignore.

Apply now for a 'balance transfer' of your home loan!