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Common Pitfalls to Avoid During a Loan Against Property Balance Transfer

Common Pitfalls to Avoid During a Loan Against Property Balance Transfer

Posted: 8th September, 2025
Updated: 12th September, 2025

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Category: Personal Loan
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Written by: Shriram Finance
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Reading Time: 3 min
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A loan against property (LAP) can help meet large expenses like renovating the house, business growth needs, children's foreign education, marriage, or real estate purchases. However, borrowers must carefully assess options before transferring an existing LAP to another provider. This article examines critical considerations and potential pitfalls during LAP balance transfers to ensure informed decision-making and optimal financial outcomes.

Understand All Applicable Fees

Processing Fees

Financial institutions incur administrative expenses related to documentation, credit assessment, property evaluation, and legal verification when processing transferred LAPs. These costs typically translate into processing fees ranging from 0.5% to 2% of the transferred loan amount. The precise percentage varies according to lender policies, the borrower's credit profile, loan amount, and whether promotional offers are available. Additional administrative charges may apply, typically ranging from ₹2,000 to ₹5,000.

Foreclosure or Pre-payment Penalty

Financial institutions suffer re-deployment issues when existing loans are closed prematurely. To deter premature withdrawals, old financial institutions usually charge foreclosure fees of up to 1-5%* or higher on the amount repaid, depending on the tenure completed. The longer the completed tenure, the lower the foreclosure charge.

Compare applicable charges across financial institutions to avoid nasty surprises later. Computing effective savings after factoring in all costs assists prudent decision-making.

Evaluate Overall Cost Savings

The interest rate differential between the old and new loan providers is an incomplete measure. So, you must compare:

●    Interest rate differential
●    Balance transfer fees
●    Changes in tenure and Equated Monthly Instalment (EMI)

A seemingly small interest rate difference of 0.5%—1% can be negated by high balance transfer charges, leaving little net savings. If a new financial institution offers a longer tenure, monthly payouts reduce, but total outlay over tenure rises, impacting overall savings. Carefully assess if a lower rate adequately compensates for elevated transfer charges and longer tenure.

Pro Tip:

Approach the existing loan provider with a competitive offer from another company. The existing lender may be persuaded to match the rate or terms rather than lose trustworthy customers. This circumvents the additional documentation and property evaluations required when changing financial institutions.

Assessing Impact on Credit Score

One of the most common property loan transfer issues is that borrowers fail to assess the impact on their credit score. As per the underwriting practices followed by financial institutions:

● Multiple LAP applications or transfers within months indicate credit hunger, signalling repayment risks. This can negatively affect credit ratings.
● Supplementing transferred LAP with further borrowing too soon also raises red flags.

After the LAP transfer, avoid applying for credit supplements, enhancements, or a second LAP with any lender for 6-12 months. Let the new LAP tenure progress adequately before additional borrowing.

Transferring Partial Amount

Consider whether you need to transfer the entire LAP or just a part of it. Transferring only a portion can reduce your risk if you are unsure about the new lender’s service or want to keep some relationship with your existing lender.

By diligently assessing all factors and implications rather than just the interest rate differential, borrowers can transfer their LAP amounts prudently. Preventing assumptions, checking fine print across providers, and evaluating overall costs enable informed decisions. With prudent adherence to balance transfer guidelines and credit health norms, borrowers can secure better pricing or features without added risks or over-leveraging.

The Bottom Line

By avoiding common errors, borrowers can safely undertake LAP balance transfers while benefiting from better pricing or features. The key lies in diligent comparison, factoring in all costs and implications. Transferring your existing Loan Against Property (LAP) to a trusted provider like Shriram Finance can help you optimise your interest outgo, adjust your repayment terms, and access additional funds as your financial needs change. What appears to be a small percentage difference in rates can turn out to be more expensive if other charges are steep. Careful assessment helps prevent financial strain later.

FAQs

1. Can hidden charges affect the benefit of LAP transfer?

Yes, hidden charges can diminish savings expected from an LAP balance transfer. Processing fees by the new lender and foreclosure charges by the old lender must be factored in to arrive at net savings. Failing this, a lower interest rate differential appears attractive on the surface, but actual savings may be low post all charges.

2. What are the most common mistakes made during a LAP balance transfer?

The most common pitfalls in LAP balance transfer are not diligently evaluating overall cost savings, undertaking too many transfers or loan applications in short succession, which affects credit rating, taking credit supplements soon after transfer, and opting to transfer the full LAP amount rather than a partial amount, which elevates risks if the new lender underperforms later.

3. What happens if I miss a document during the LAP transfer process?

Missing any mandatory KYC or income documents during underwriting is one of the common errors in LAP transfer that will lead to outright rejection of your transfer request. To avoid this, check the detailed document list required at the application stage itself and furnish complete papers. Follow up persistently with respective teams if any queries are raised to promptly provide pending submissions.

4. Can poor credit history affect my LAP transfer?

Yes, financial institutions will reject LAP transfer requests if your credit report and repayment track record display delays, defaults or over-leveraging signs. Have the issues rectified by the credit bureau ahead of the transfer application. Also, avoid further borrowing for 6-12 months post-transfer to prevent a credit rating impact.

5. Should I be concerned about the property’s current valuation?

The property valuation must adequately cover the transferred LAP amount as per lending guidelines. If current valuations have dropped due to market corrections, and required cover is insufficient, institutions may ask for a top-up against property or trim the LAP sanction amount. Provide updated ownership papers and recent valuations proactively if substantial fluctuations.

6. Can I transfer my LAP if I’ve already defaulted or delayed EMIs?

It is unlikely that any lender will approve an LAP if existing EMIs have seen defaults, delays, or non-payments due to perceived documentation and credit risks. Rectify repayment issues with the old lender first before attempting a balance transfer to a new one.

7. What if I transfer the loan too late in the tenure?

Transferring LAP within the first 3-4 years of availing the loan is advisable to realise savings benefits for a longer tenure. If done later, savings are limited with a shorter repayment tenure left, while charges continue to be similar for the new lender. A comparison of net savings should guide appropriate timing.