The persistent rise in interest rates over the last one and a 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 per cent for a lot of home loan borrowers. To offset the immediate impact on finances, some lenders have extended the tenure, keeping the EMI intact. In some 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, thereby squeezing the finances of such borrowers. This is the time they want to switch to low cost loans particularly when they know that new borrowers are getting good rates.

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, the costs and the tax implications if a borrower shifts his loan.


First, you need to identify a 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 a housing loan with all the relevant documents. You can also explain the situation you are in. On receiving the sanction letter from the prospective lender, you can approach your existing lender with a request to provide you the total outstanding amount (principal + interest).

You can also request for a letter addressed to your new lender stating the total amount outstanding, on payment of which, your property documents as listed in the letter will be handed over to the new lender.

This may seem a straightforward procedure, but it is very difficult to get such a letter from the existing lender. Therefore, you should approach your existing lender while applying 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 also cost money.

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

If your track record of payment is good, there are chances that your existing lender will himself offer you an option of shifting to a lower rate by paying some fees that will more or less be equal to the prepayment charge. If the rate offered is comparable to that of a prospective lender, then it is better to stay with the existing lender as you will save on a lot of administrative hassles and also the processing fee that the prospective lender will charge you.

Now, to tax matters. 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 interest is dependent on two factors. First, whether the house property is self-occupied or let out. The second being, the time when the loan was taken. In case of self-occupied property the present deduction available is Rs 1.50 lakh However there is no such limit in case the property is let out. In case you own two houses, one of the houses at your option shall be treated as let out and the deduction will not be applicable 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, that is 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 up to Rs 1 lakh towards repayment of the principal under Section 80C. This benefit is available to you within overall limit of Rs 1 lakh for other eligible items of investments and expenses specified in Section 80C.

However there is no provision to treat the second loan as home loan and you may not be eligible to claim the benefits in respect of principal repayment.

The proposed Direct Tax Code (DTC) intends to take away the benefits of principal repayment in respect of housing loans and no tax benefits will be available 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 April 1, 2012.

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.
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