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 |
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 |
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.
