Home loan repayments are huge commitments that most families face. Sometimes, there is a huge difference in interest rate between what the borrower currently pays his bank and what another lender offers. In such a scenario, people consider either prepaying their loan or switching the lender. Switching to another lender offering better rates is called balance transfer.

Expenses involved

A balance transfer of the outstanding loan from one bank to another can result in savings of a few thousand rupees, month after month in your EMIs. Borrowers must exert due diligence before exploring the balance transfer option. The existing lender charges a penalty for prepayment and the new lender may seek processing fees. These expenses must be taken into account while weighing the benefits of a balance transfer. Some lenders may levy additional switching charges that must be taken into account as well.

When it works well for you

It makes sense to go ahead with a balance transfer if your net gain is more than one percent. This is after factoring in the prepayment penalty of two percent and loan processing charge of 0.5 to one percent. Since lower rates are applicable for a new borrower (rather than existing borrowers) shop for competitive rates and a good lender. After the switching exercise, you shouldn't get a rude jolt that the new lender has increased the rates. So find out if any rate hike is on the cards before switching.