How to shift your Home Loan?

The persistent rise in the interest rates over the last one and half years has put tremendous pressure on the home loan borrowers, particularly the ones with floating rate option. The interest rates have gone up from around 8% to 12% for a lot of home loan borrowers. To offset the immediate effect on the finances, some lenders have  extended the tenure,  keeping the EMI intact.

However in those cases where it was not possible to extend the tenure of the loan due to factors like age of the borrower, the EMI went up significantly, thus putting pressure on finances of such borrowers.  This is when they want to switch to low cost loans particularly when they know that new borrowers are getting good rates.

So if you are getting this step motherly treatment – the time is now to act.
Exercise the  option of  shifting the existing loan from one lender to another which offers you a better rate. Since you will be treated as a new borrower by the new lender, you may be offered better rates than what you are actually paying presently.

So how can you shift the existing loan from one lender to another?
This article will discuss the process, costs and tax implications if a borrower shifts his loan.

The Process:

Firstly you need to identify the  lender who is offering significantly lower rate of interest than what is being charged by your existing lender. Once this is done, make an application for housing loan with all the relevant documents. You can also explain the situation you are in to the person handling your case.

On receiving the sanction letter from the prospective lender, you  approach your existing lender with a request to provide you the total outstanding amount (Principal + Interest).

Once existing lender provides you this letter stating amount outstanding as on near future date, on payment of which you will be handed over the property documents. You can also request your existing lender to give you a letter addressed to new lender stating the amount outstanding as above on payment of which they will hand over the documents to the new lender.

This letter should contain the list of documents lying with the existing lender, which will be handed over to the new lender once the amount stated above is fully paid. However it is very difficult to get such a letter from the existing lender. Hence you should approach your existing lender while you are making application to another lender simultaneously. You will also need an NOC from the Society/statutory authority/builder etc. in favour of the new lender and this may take time and/or also cost money.

The Costs:

The shifting of an existing loan comes with a cost. The existing lender charges an amount ranging between 0.55% to 3.31% in case you prepay the loan before completion of the tenure of the loan. In addition to the existing lender charging you a prepayment charges, the prospective lender will charge you fee for processing your loan application. This fee varies from 0.55 to 1.1% but is normally subject to a maximum of around Rs. 11,000/-. In case your track record of servicing your loans/credit card is excellent, you can negotiate this fee. In case you have excellent track record of repayment, the prospective lender may even agree to waive the processing  fee.

Chances are if your track record of payment is good your existing lender will itself offer you the facility of shifting to its own cheaper rate by paying some fees  that is likely to be equal to or less than the pre-payment charge that it charges you. If the new rate being offered by the lender is in line with what the new lender you can agree to stay with your existing lender by paying the fees since you will save on the processing fees (payable to the new lender) as well as a lot of administrative  hassles.

The tax implications:

The income tax law provides you dual benefits in respect of housing loans.  You are entitled to claim interest payment in respect of loan taken for purchase or construction of a house. The quantum of interest is dependent on two factors. First whether the house property is self-occupied or let out. Other being the time when the loan was taken. In case of self-occupied property the present deduction available is Rs. 1.50 Lacs. However there is no such limit in case the house property is let out. In case you own two houses, one of the houses at your option shall be treated as let out and accordingly the limit of Rs. 1.50 lacs shall not apply for interest payment.

As per the provision of existing laws of income tax, even a loan taken for the purpose of repaying the first loan shall be treated as home loan and will be eligible for income tax benefits for interest payments. This  benefit is available to you only once i.e. when you borrow money to pay the first housing loan and not for subsequent loans for the same purpose.

In addition to the above benefits of income tax in respect of interest payment, the tax laws presently allow you a deduction of upto Rs. 1 lac towards principle repayment of the loan under Section 80C. This benefit is available to you within overall limit of Rs. 1 lac for other eligible items of investments and expenses specified in Section 80C. However  there is no provision in Section 80C to treat the second loan taken to repay the first housing loan again as home loan and you may not be eligible to claim the benefits in respect of principle repayment in respect of second loan taken. Possibly many  are not be  aware about this provision. General perception  is: Once  a housing loan always a housing loan!

The  proposed Direct Tax Code (DTC) intends to take away the benefits of principle repayment in respect of housing loans and no tax benefits will be available in respect of principle repayment once the DTC becomes operative. Therefore your loss is only in respect of amounts repaid during financial year 2011-2012 provided the DTC comes into effect from 1-4-2012 in case you shift your existing home loan.

To conclude, evaluate the benefits you will get due to reduced interest rates for longer period against the one time costs of prepayment penalty and processing fee. Do not forget to take into account the income tax implications of shifting your home loans as discussed above.

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