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.

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.

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.

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.

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.