The purpose of creating any asset could be two fold. Either it should add comfort or shall act as a security. The house that one builds addresses both these needs. The comfort that staying in own house gives is unparalleled and goes without saying that it is an asset that can be liquidated if at all the need arise.
Most of the houses are bought with the help of a loan which is an expensive affair given the large ticket lending and the cumbersome process to liquidate it to meet the need of cash in case of an exigency. We are going to touch upon two different factors in this post on how can one reduce the cost of loan and how to derive benefit of the loan itself and arrange for that extra fund requirement. The two terms that you should know before getting further in this post are Balance Transfer and Top Up. We shall also know as to how both these work in conjunction.
Say, one had taken an ICICI bank home loan to buy the house about 4 years back. The interest rates have fallen over period and today are at least 200 to 250 basis points lower than what they were 4 years ago. While a large proportion of loan are taken in floating interest rates, the actual benefit of a downward trend does not get passed on to the borrower to the extent it should be. On the contrary the banks are prompt to hike the interest immediately in case there is a rise. However, there is one option that can be exercised to reduce the cost of your loan and this is balance transfer.
Any business wants to have good customers on board and more so in case of the banks since they are lending money. They would want customers with good repayment records to get funded by them. So if you have been repaying your home loan installments on time and have a good credit score, you are an ideal customer from them. They will extend a highly competitive rate to take over your loan balance. This way you will be able to get your monthly installment amount reduced. The money saved from the EMI can be further invested and used to create a fund that can be used for any future expense.
However, one thing to bear in mind is the term of loan that you are left with. Any loan schedules a higher interest and lower principal apportioned in the initial years. Over a period the situation reverses. So the balance transfer may not make a lot of sense in case the loan has already been paid for a longer period, given the charges attached to the processing of the new loan.
Top Up Loan
The second factor that we are going to address today is the top up. The loan on property is based on two components viz. market value of property and the repayment capacity of the borrower. The market value of the property does increase over years while the loan amount reduces. In case of need of funds, one can apply for a top up loan. The bank will be willing to extend that additional loan to the borrower for a specific purpose. This will require minimal documentation and will get processed fast.
Top up loan can be used for varied purpose like marriage in family, medical or even that dream vacation. However, what you need to know is that the top up loan comes at a slightly higher cost than the existing home loan.
Now in case you are in need of a top up, it would be the right time for you to approach alternate housing finance companies for a balance transfer plus a top up loan. This way you would be able to derive the best mileage from the new lender. Not only existing outstanding would come at a cheaper price, the new loan amount will also be at much lower cost than what could possibly would have been charged by the existing bank.
So go ahead and fulfill your requirements of funds at a lower cost.
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