During a casual conversation with my friend confession to me that he was not aware of the rate of interest charged on his home loan. I then realized that many persons who take a home loan, generally, do not bother to check what rate of interest their lender is charging them. Nowadays, most of the home loans are given on a floating rate basis where the rate of interest changes with changes in external factors more frequently. Therefore it is worthwhile for you to check, once in a while, the rate of interest being charged on your home loan. In case your lender is charging you a higher interest rate on your home loan than what others are offering in the market, it always makes sense for you to either shift to another lender or to evaluate the possibility of getting the rates reduced by your existing lender itself. Let us discuss how to go about it and other factors to be considered for this purpose.
The process to shift your home loan to another lender
First of you have to make a comparative evaluation of the rates offered by various lenders in the market. And then you should approach your existing lender with a request to reduce the rate. The lender may offer you it on payment of a certain fee. If your lender is willing to offer you the rate which is available from other lenders, it makes sense for you to go for it as it is the simplest option to implement as it does not involve any movement of documents.
In case your lender does not agree, you should approach the lender offering a better rate than your existing lender. Make an application with the proposed lender with all the necessary documents including the photocopies of the property documents. After you have received a sanction letter from the prospective lender, you have to approach your existing lender with a copy of the sanction letter with a request to give you a letter to mentioning the amount outstanding with interest on payment of which the existing lender will hand over you your original property papers. The lender may also be requested to address the letter to the new lender mentioning the amount outstanding. Since it may take some time for the new lender to disburse the money, the letter may be requested to mention the due outstanding of a future date anything between 15 days to one month. In some of the cases, both the lenders will take it forward and make payment to your existing lender against the delivery of your property documents.
The cost of shifting
Shifting of home loan does not come free and you have to evaluate the costs involved in it. First of all the existing lender will charge you anything between 0.50% and 0.75% for the prepayment before completion of the tenure of the loan. In case the home loan is taken from a housing finance company and is under a floating rate regime, they have been advised not to levy any prepayment charges. However, in the case of fixed-rate home loans, the housing finance company can levy the prepayment charges. Banks do not follow uniform policies and you will have to ascertain the charges from them in advance. Additionally, the new lender will also charge a processing fee for your loan application. This varies from 1% to 1.5%. In case you have a good track record of servicing your existing home loan, you can negotiate this fee. In some cases, the prospective lender may even agree to waive the processing fee. Since the festive season is setting in, many lenders may announce to waive the processing fee or may restrict it to some absolute amount like one thousand rupees.
Income tax implications:
Under the tax laws, you can claim tax benefits for a home loan in the form of interest and principal repayment under Section 24(b) and 80 C respectively. As per the income tax law, a loan taken for the purpose of repaying the first loan is treated as a home loan and is eligible for income tax benefits for interest payments. Please note that this benefit is available to you only once i.e. when you borrow money to pay the first housing loan and not for subsequent transfer of the same loan. Even the processing fee paid for prepayment as well as to the new lenders is also tax-deductible under Section 24(b) as the same is included in the definition of interest under the tax laws.
To conclude, evaluate the benefits you will get due to reduced interest rates for a longer period against the one-time costs of prepayment penalty, processing fee. Do not forget to take into account the income tax implications of shifting your home loans as discussed above.
The writer is a tax and investment expert and working as Chief Editor of ApnaPaisa. He can be reached on firstname.lastname@example.org