Prepayment or home loan balance transfer: Which one to choose?

Recently, the Reserve Bank of India has updated its monetary policy in an effort to fight inflation. Thus, they have increased the repo rate by 50 basis points to 5.90%. This has subsequently increased the home loan interest rates. It has burdened both existing and new home loan borrowers; however, there are ways to reduce the interest rates.
There are two ways following which one can reduce home loan interest rates- through a home loan balance transfer or through prepayment of a home loan. To know in detail about both of them and understand which option will work best, read on.

About home loan balance transfer

This is an ideal solution for those who don’t have adequate funds to prepay the loan amount. Suppose one comes across a lender that offers home loans at a lower interest rate than the existing lender. Then the borrower can transfer the loan to that lender. This is also beneficial for those who have seen a drop in the interest rate in future and want to transfer your home loan.

Top advantages

1. Lower interest rate

One of the biggest advantages of opting for home loan balance transfer is that one can avail loan at a lower interest rate. Here the other financial institution is offering a home loan at a lower interest rate than the existing lender.

2. Get the option to change the interest rate type

One gets the flexibility to change the type of interest rate from flexible to fixed or vice versa.

3. Option to get a top-up facility

While transferring a home loan, the borrower might get an additional top-up home loan facility from their upcoming lenders. This can be availed at a lower interest rate and can be used for personal purposes as well.

4. Flexible loan tenor

In addition,If one finds the current EMIs unaffordable, one can either extend or reduce one’s loan tenor by reducing or increasing one’s EMI amount. They can choose the loan tenor as per their comfort.

Prepayment of home loan

Prepayment refers to the prior payment of the outstanding loan amount, either in full or part. But if the borrower wishes to pay the amount in advance, they must pay an EMI of either two months or more. In addition, this option is accessible only to those who have additional funds to prepay the outstanding home loan balance amount.
Usually, in the case of a floating interest rate, there is no such penalty for prepayment. But in the case of fixed interest rates, prepayment is charged with a penalty of up to 5%.

Top advantages

1. Saves more interest

In addition,If one wants to maximise savings on interest payments, one can prepay home loans. The earlier one prepays the loan the more one can save interest on it.

2. Reduces the loan tenor

By prepaying home loans, one can also reduce the home loan tenor as per one’s preference. Often if any prepayment is made, the lender adjusts the loan tenor.

3. Focus on other commitments

One can easily pay focus on other financial commitments if one becomes free from any sort of debt at the earliest.

Which one to choose?

Before deciding, one should compare the total costs, benefits and cons of both of them and check which outweighs the other. In addition,Though prepayment of a home loan is a wise decision to make, however, if one is opting for it, one must ensure that they have adequate funds for unforeseen emergency situations.
Nowadays, with affordable repayment terms and competitive interest rates, home loan applications have witnessed a potential growth. In addition, existing borrowers can opt for a home loan balance transfer to further increase the affordability of housing loans.

Conclusion

In addition,The facility of a home loan balance transfer brings several benefits, such as lower interest rates, pre-payment facility, etc. However, an individual opting for this facility should consider associated charges and perform a cost-benefit analysis to ensure that they are saving considerably.
In addition, if one is opting for a home loan balance transfer, one must use a home loan balance transfer calculator to calculate the overall charges that one needs to pay their new lender. Also, before choosing any of these methods, one should also check one’s eligibility for the same.
Various reputed lending institutions and NBFCs provide pre-approved offers for streamlining the loan process. These offers are available for financial products like loans against property and others. Individuals can check their pre-approved offers by providing their requisite details, such as their names and contact numbers on the lender’s site.
In addition, one has a clear idea regarding both ways of reducing home loan interest rates and the advantages of each of them. So one can easily compare and come up with a decision on which one to prefer- home loan balance transfer or prepayment of the loan.