Balance Transfer Math Most Borrowers Skip

A balance transfer moves your loan to a new lender at a lower rate. It rarely costs nothing. The new lender charges a processing fee, which is a percentage of the outstanding amount plus GST, and may add legal, technical or property valuation charges. Your old lender may also have a charge for closing the loan, which depends on the loan type and your agreement.

On a ₹50 lakh loan, every 0.1% of fee is ₹5,000 before GST. We do not give a typical fee, because it varies by lender and changes. Ask the new lender for every charge in writing, and add them up before you start.

The sum that matters is simple: total switching cost ÷ monthly saving = months to break even.

If you will keep the loan, and the property for a home loan, for longer than that, the transfer usually pays. If you may sell, prepay or move before then, the switching cost can outweigh the saving.

Here is how the rate gap changes it. Take ₹50 lakh outstanding with 15 years left, currently at 9.5%, and suppose the total switching cost comes to ₹50,000 (an example figure, not a typical one):

• 0.25 percentage point lower (9.25%): saves ₹752 a month, so a ₹50,000 switching cost takes about 67 months to recover.

• 0.5 percentage point lower (9%): saves ₹1,498 a month, so a ₹50,000 switching cost takes about 33 months to recover.

• 0.75 percentage point lower (8.75%): saves ₹2,239 a month, so a ₹50,000 switching cost takes about 22 months to recover.

• 1 percentage point lower (8.5%): saves ₹2,974 a month, so a ₹50,000 switching cost takes about 17 months to recover.

The smaller the gap, the longer the wait to recover the cost. Put your own cost and rates into the same sum.

Early in a loan most of each EMI is interest. Late in the loan most of it is principal, so the same rate cut saves less. Take the same ₹50 lakh at 9.5% moving to 8.75%. The interest you would save over the rest of the loan, by the years left:

• 15 years left: ₹4,02,984

• 10 years left: ₹2,44,248

• 5 years left: ₹1,09,389

• 2 years left: ₹41,324

So a transfer that clearly pays with 15 years left may not with 2 years left. If you plan to prepay or close the loan soon anyway, a transfer adds cost without much time to recover it.

Before you start a transfer, ask your current lender whether it will lower your rate. It costs you a phone call. Ask what the new rate would be and whether it charges a fee for the change, and get the answer in writing. Compare that with the full cost of a transfer. Even if you expect to switch anyway, the answer tells you what the transfer has to beat.

For floating-rate loans to individuals taken for non-business purposes, the RBI directions say the lender cannot charge a foreclosure fee. That rule is covered in our article on foreclosure charges, and it affects what a transfer costs you at the old lender. Fixed-rate loans and business loans can still carry a charge, so read your loan agreement.

FinResp's balance transfer calculator does this sum for your own balance, rate and time left, including processing fees you enter. The figures above are illustrations of the arithmetic, not offers from any lender.

This is information, not advice.