Home Loan conversion fees is one of the mysteries for home loan borrowers. I receive multiple queries wherein borrowers paid Home Loan conversion fees multiple times but still their home loan interest rate is more than the interest rates offered to the new borrowers. I have covered this topic in my post, Why higher interest for existing home loan customers? The problem here is that existing borrowers have NO other benchmark to compare. I also agree that home loan interest rate offered to new borrowers should be the benchmark for existing borrowers.
Let me share an interesting case in this regard. On 19 Oct 2011, NHB i.e. National Housing Bank issued following circular
The circular states that all the housing finance companies will charge a uniform interest rate for old and new customers who are on a floating interest rate. This was irrespective of the fact when the home loan was availed. In other words, the concept of home loan conversion fees was abolished. In layman terms, if the HFC is offering 9.20% interest rate to new customers then all the existing or old customers will by default pay the same interest rate.
Unfortunately, this rule was never implemented and NHB quietly withdrew this circular on 22 Aug 2014. Please check following link
What is Home Loan Conversion Fees?
In a laymen terms, home loan conversions fees is charged by the bank or HFC to reduce your home loan interest rate. It is normally 0.25% or 0.5% plus taxes of the principal outstanding. Some banks or HFC’s cap the upper limit in absolute terms.
Please note that in certain cases, if the loan is partly disbursed the home loan conversions fees is charged on the principal outstanding + undisbursed loan amount. In such cases, it might not be beneficial for the borrower to opt for it.
Some of the readers of the blog asked me why banks/HFC charge home loan conversions fees. Why don’t banks/HFC’s reduce home loan interest rate automatically? My simple answer is
A. It is a source of income for banks and HFC’s
B. By charging home loan conversions fees, bank passes the benefit of lower interest rate only to a limited set of customers. If by default all customers are moved to lower interest rate then it will deeply impact the profitability of the bank or HFC. In other words, home loan conversions fees is an entry barrier to avoid offering to all customers.
In some instances, borrower fails to calculate the interest rate savings. Thus opt for higher interest rate compared to home loan conversion fees offer. He may pay additional interest of say 2L instead of paying 20k home loan conversions fees and reduce the home loan interest rate.
Also Read: 11 Facts you don’t know about your Home Loan
Home Loan Conversion Fees – 7 Myths Every Borrower Should Know
1. Revised Interest Rate will be at par with the NEW borrowers:
It is a myth that after paying the home loan conversion fees your interest rate will be at par with NEW borrowers. Normally, the borrower does not check revised interest rate in advance. For example, one of the leading private sector banks never offers interest rate at par with new borrowers. A borrower X was paying 9.95% interest and after paying conversion fees his interest rate reduced to 9.4% whereas bank was offering 9.3% to the new borrowers.
In such cases, i always suggest readers negotiate with the bank. In 70% cases, if you negotiate, the bank will revise their offer and agree to lower interest rate.
2. Home Loan conversion fees cannot be waived off:
Though it is subjective but not true. If you are a good customer and paying all the EMI’s on time then bank or HFC may waive of your home loan conversion fees. At the same time, it is not as simple as that. You have to play the gamble of balance transfer i.e. you can tell your bank that since the interest rate is high you are shifting your home loan to some other bank. In this case, your home loan provider may offer a waiver of home loan conversion fees.
3. Bank is obliged to reduce Home Loan Interest Rate:
To clarify, the bank is not obliged to offer lower interest rate even if you are willing to pay conversion fees. In such scenario, the only option left for a borrower to balance transfer your home loan.
4. Once in a lifetime fees:
Many borrowers are under impression that once the home loan conversion fees is paid then for balance tenure their home loan interest rate will be at par with new borrowers. It is not correct. Many customers blame RBI for this but RBI has nothing to do. To know why this difference will crop up again, you need to understand how the interest rate is calculated. Let me share
Lets’s Assume the MCLR or Marginal Cost of Funds Based Lending Rate of a bank is 9.10%. Your current spread is 0.45%. Therefore, your interest rate is 9.55% i.e. 9.10% + 0.45%. Assuming, currently, the bank is offering an interest rate of 9.30% i.e. spread of 0.20% on MCLR. You paid home loan conversion fees and the bank agreed to reduce your spread to 0.20%. Therefore, your home loan interest rate will reduce to 9.30%.
In this case point to note is that technically bank has not directly reduced your home loan interest rate because it is linked to MCLR and spread. Bank only offered you to reduce your spread from 0.45% to 0.20%. Because of this, your home loan interest rate decreased.
Assuming after few months, the bank decided to reduce the home loan interest rate for new customers to 9.10% without decreasing MCLR. Therefore, again there will be the difference between your and new customers interest rate. Bank will again charge home loan conversion fees to reduce your spread from 0.20% to 0%. Though this situation is highly unlikely i.e. your spread is 0%. In this case, your interest rate will move in tandem with MCLR.
To summarize, you should understand the movement of MCLR and spread to avoid any future shocks.
5. Limit on no of times you can avail home loan conversion fees offer:
Though banks may not directly inform you but some banks have the policy to provide home loan conversion fees offer only twice or thrice during home loan tenure. This also explains the reason for point no 3 that bank is not obliged to offer as and when the customer demand.
Therefore, if the bank has a limit on no of home loan conversion fees offer you can avail during home loan tenure then you should not avail for minor reductions say 0.1% or 0.2%. Though it is subjective and the decision may vary from case to case basis.
6. We do not charge home loan conversion fees:
Sometimes the sales team of bank or HFC mislead potential home loan borrowers, especially for balance transfer. They insist the customer of Bank A shift his/her home loan to their bank. A false promise is made that after balance transfer you will not be charged home loan conversion fees to reduce the home loan interest rate.
Let me clarify it is not a correct understanding. All the banks and HFC’s charge home loan conversion fees. In extreme cases, some of the banks or HFC’s does not follow this concept at all i.e. altogether you cannot reduce the home loan interest rate by paying home loan conversion fees. Therefore, existing home loan customers continue paying high-interest rate.
7. Not possible to reduce interest rate for fixed interest rate home loans:
Though it depends on the internal policy of the banks but most of the banks and HFC’s offer existing fixed interest home loan customers to reduce the interest rate. The fee is same as for floating interest rate. In many cases, the bank staff is not aware of the rules and simply say NO. Therefore, you should check from multiple sources like helpline of bank / website / online forums whether this facility is available or not.
My personal observation is that you will not find information on home loan conversion fees on the official website of the banks / HFC’s. Only handful home loan providers post this information transparently.
Words of Wisdom:
Before you jump to accept an offer from the bank to reduce the home loan interest rate by paying home loan conversion fees it is important to calculate the financial impact. At the macro level, you need to check net financial impact i.e. net savings. For example, if i am planning to prepay the home loan in next 2 years then it might not be financially beneficial. The reason being, you will pay X amount as home loan conversion fees but you may need Y no of months savings will be adjusted against X i.e. you need to calculate gestation period to recover the upfront cost i.e. home loan conversion fees. Based on that you may decide to go ahead with conversion offer or not.
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