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Refinancing loans

Larissa Fernand

Transferring outstandings from one card to another has become quite popular with credit card issuers. Now, it looks like the stage is set for even housing finance companies to do the same. Read on to figure out how it works.

Assume you took a housing finance loan from HDFC way back in 1993. You still owe them Rs 2,00,000 and are servicing this amount at the rate of 21 per cent per annum. With the drop in housing finance rates, you can now get a housing finance loan for as low as 12 per cent per annum onwards. So, you approach one of the players who actually offers refinancing.

Currently, it is limited to the Hongkong and Shanghai Banking Corporation (HSBC), Citibank and the Housing and Urban Development Corporation (HUDCO). Assume you take the loan from HSBC. The latter will prepay HDFC's loan of Rs 2,00,000 and, in effect, you now owe HDFC nothing. Instead, you owe Rs 2,00,000 to HSBC. You service HSBC at whatever interest rate it has levied.

Before you opt for refinancing, you will have to check out the administration and processing fees for the new loan, and also if there is pre-payment penalty for the loan that you are repaying in full. Total these costs along with the new equated monthly installment (EMI). They should amount to less than what your all your balance EMIs amount to. To actually benefit from refinancing, the interest rate should be substantially lower than what you are currently paying.

However, there exists a grey area here. A housing loan entitles you to a tax rebate. But refinancing your existing loan may or may not entitle you to such a discount. One argument is that it should not entitle you to any rebate as you are using the loan to finance another and not to buy a property outright. On the flip side, if the mortgage is clearly assigned to the bank, there should be no problem since the security is the house.

To add to the confusion, the Reserve Bank of India has stated that loans given for the purpose of taking over loans of other entities cannot be included under housing finance allocation. Instead, it should be shown as a sub-item under the heading 'Housing loans taken from other banks'.

The conclusion: it will depend on the income-tax officer's interpretation of the law. Talk to your chartered accountant before you take any decision in this regard.

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