Home loans are undoubtedly one of the biggest debts that individuals will pay in their lifetime. The size of an average home loan is 30 lakhs or more and extends for 10 to 30 years. Generally, home loans are repaid in the form of monthly EMIs. The EMI comprises both the principal borrowed and the interest charged on it. The interest on a home loan could very well run into several lakhs.
Given the long tenure and the large ticket size of home loans, even a slight reduction in interest rates could reduce the overall burden of the loan significantly. Very often, borrowers find that the interest rates have decreased since the commencement of their loan. But, since they are stuck in a fixed-rate home loan, they cannot avail the benefits offered by the reduction in prevailing interest rates.
In such cases, home loan refinancing is a huge benefit. Refinancing or home loan transfer is the process of switching an existing home loan from one buyer to another to avail the benefits of reduced interest rates.
To understand home loan refinancing better, let’s take a look at the various benefits it offers.
Benefits of a Home Loan Balance Transfer
Transferring your existing home loan from one lender to another helps you enjoy a reduction on interest rates, which in turn lowers the monthly EMI. Let’s explain this with an example.
Consider the case of Arun, an existing home loan borrower. He has availed a home loan for 15 years at an interest rate of 10% from Bank A. Currently, the remaining principal in his loan is Rs. 25 lakhs. Now, he finds that Bank B offers him an interest rate of 9%. By switching his home loan from Bank A to Bank B, Arun would be able to save Rs. 18,336 per year. This translates to a whopping Rs. 2,75,040 for the rest of the tenure. That’s a massive saving and Arun can enjoy this savings by opting for home loan refinancing.
Besides reduction in interest rates (and subsequently lower EMIs), other benefits of home loan transfers include:
Better services with the new lender
Decrease or increase in tenure of the home loan
Improved credit scores
Availability of top-up loans, etc.
Now, that we’ve seen the benefits of home loan transfers, let’s focus our attention on the eligibility criteria.
Eligibility Requirements for Home Loan Transfers
You can opt for home loan refinancing if you meet the following conditions:
You must have an ongoing home loan with a bank, NBFC or a housing finance company.
Some lenders require that you have completed paying a certain number of EMIs on your home loan (6 or 12 months) before you can switch it to another lender.
You must not have defaulted on your current home loan EMI payments.
In case of properties under construction, the transfer is possible only after approval of the project by the new lender.
In the case of completed properties, refinancing is possible only when the property registration is completed.
Besides these general criteria, different lenders have other varying eligibility factors like:
The credit score of the borrower
Age, income, and employment history
Loan to value ratio, etc.
One of the main factors that determine your home loan refinance is your credit score. Most lenders do not approve home loan transfers of borrowers with poor credit scores and credit history.
Impact of Credit Score on Home Loan Refinance
Banks consider the credit score of an individual before approving any loan – including home loan balance transfers. The credit score is a numerical score that is assigned to an individual based on his/her credit history. Higher the credit score, better is the repayment capacity of an individual. Lenders prefer borrowers with high credit scores, as they are considered trustworthy and low-risk.
The credit score ranges from 300 to 900, with 900 considered the best possible score. Various credit bureaus generate it after considering several factors like credit utilisation, payment history of past loans and credit card bills, types of credit, etc.
The higher the credit score, the lower the probability of default. Hence, lenders offer the best interest rates to borrowers with higher credit scores. Missing out on loan EMI payments or defaults on credit card bills reduce the credit score. Similarly, high utilisation of credit limits on credit cards indicates that a person requires plenty of credit, which in turn, lowers the credit score.
What is the credit score required for home loan refinancing?
There is no fixed number that acts as a cut-off. Instead, lenders determine the eligibility for home loan balance transfers on a case-by-case basis. With that said, having high credit scores and good credit history will help you avail the best possible interest rates.
Tips for Borrowers to avail better Interest Rates while applying for Home Loan Balance Transfers
#1: Check your credit score and report. Ideally, you should do this step way ahead of applying for home loan refinance. This way, you get plenty of time to resolve any issues and work on improving your credit score is required.
#2: Do not apply for balance transfer requests to multiple lenders. As this increases the number of inquiries made for your credit report, it could reduce your credit score.
#3: If you have good credit scores and a perfect loan payment record, then negotiate hard with the lender to avail the best possible interest rates.
#4: Once your request for home loan transfer is approved and sanctioned, work hard to improve further (or maintain) your credit score. This helps you enjoy a further reduction in interest rates in the future.
Improve your Credit Score to Get the Best Possible Refinance Interest Rates
Home loans are big-ticket loans and even a slight reduction in interest rate could offer savings in lakhs of rupees for the borrower. However, to be eligible for the best possible interest rates on a home loan transfer, you need to work on improving your credit score.
So, make sure to check your credit score and work on improving it, before you approach a lender for home loan refinancing.