Hopping Over

Pritam P Hans | Print Edition: June 2012

Home loans have become integral to home buying. They allow you the joy and pride of owning a house in a short time. But paying equated monthly instalments (EMIs) can be a big burden. And if your lender is charging you more than others, the pain can multiply.

However, there is no need to be forever stuck with your overpriced loan.

In April, the Reserve Bank of India (RBI) asked banks to stop levying foreclosure charges and pre-payment penalties on floating rate home loans. The levying of these charges was seen as a restrictive practice to deter borrowers from switching to lenders offering lower rates.

"It is felt that the removal of foreclosure charge/prepayment penalty on home loans will lead to a reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of home loans with floating rates," the RBI said in its Monetary Policy Statement 2012-13.

Should you shift to a lender offering a lower rate? Or should you first ask your existing lender to lower the rate? And last, but not the least, how will the shift affect your standing with consumer credit rating agencies? Let's find out the answers.

Should you switch your bank?

Paying less is always better, but a lower interest rate may not always mean that.

"Switching makes a lot of sense now that pre-payment charges have been abolished. However, other charges need to be taken into account," says Jai Adiani, certified financial planner and founder, FPGuru.com, an online portal.

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Financial planners say you should first negotiate with your existing lender. "If your lender offers a lower rate, there will be a conversion fee, usually 0.50-1.75 per cent of the outstanding loan amount," says Adiani.

However, if the lender does not agree or another institution is offering an even lower rate, you can consider shifting the account. In such a case, the new lender will charge processing fee, stamp duty for mortgage and other fees. Shift if your existing EMI is more than the total cost of the new loan (EMI plus the shifting cost). "Ideally, do not shift if the loan tenure is nearing its end," says Adiani.

If you want to pre-pay from your savings, financial planners will encourage you to analyse your finances.

"You should pre-pay whenever possible, especially if you have made any windfall gain. The withdrawal of pre-payment levy is all the more reason to pre-pay," says Jayant R Pai, certified financial planner and head, marketing, PPFAS Asset Management Private Limited.

Though the pre-payment penalty is not a worry now, consider your immediate financial needs as well. If you need money in the near future for goals such as child's wedding or education, the payment can wait.

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"Investment in assets, both debt and equity, invariably gives a higher yield than the home loan rate, especially when adjusted for tax benefits. Hence, anyone with excess liquidity should try to build other assets instead of repaying the loan," says Anil Kothuri, chief executive officer, Edelweiss Housing Finance.

"It is better to invest in debt instruments rather than equity so that you do not face any asset-liability mismatch when your EMIs are due," says Pai.

What's the incentive?

Being debt-free should be your ultimate goal, but you need to evaluate the tax benefits of home loan as well. You can claim Rs 1 lakh deduction for repayment of principal under Section 80C of the Income-Tax Act.

An additional Rs 1.5 lakh deduction can be claimed against interest payment under Section 24B. There is no ceiling for the deduction if income from the house is assessed in your tax returns. The question you should ask is if you would like to retain a long-term liability to just avail of the tax benefit.

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"While looking at pre-paying home loans, do not get swayed by tax benefits. You can avail of the Rs 1 lakh deduction under Section 80C through various other instruments," says Pai of PPFAS. "The only loss will be the tax benefit on interest payments," he adds.

Though repaying means less tax is saved, it will improve your score with consumer credit rating agencies. "Pre-payment will typically have a positive impact on the score if all EMI payments have been regular," says Mohan Jayaraman, managing director, Experian Credit Information Company.

"Frequent switching of loans may impact the score by showing up as frequent access to the credit market," he says.

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