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
http://www.nhb.org.in/Regulation/pol%20cir-44.pdf
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
http://www.nhb.org.in/Regulation/NHB-ND-DRS-Policy-Circular-No-64-14.pdf
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.
Copyright © Nitin Bhatia. All Rights Reserved.
-My emi is 20,000 rupees and pending no of emi is 143 months in Hdfc Ltd.
-Should I pay 4862 rupees conversation fees to reduce interest rate from 9.70% to 9.20%?
-In that case my new no of emi will be 137.
You may go ahead and pay conversion fees.
Thank you sir.
Hello Nitin ji first of all im very thankfull to you for providing such a great information , I just a quiry about my existing home loan with sbi of 48lacs tenure 30yrs taken on july 15 emi 39900 which was linked on bplr @ 9.35% presently charged i just saw on website the rate revised to 9.10% ,i called the bank and come to know that previously my hl is linked by bplr now the fresh loans from apr 16 are been done on mclr so get the reduced rates i have to pay a conversion fee to sbi of .575% so get the lower interst rate pls suggest that what shall i do, Best Regards
Please check my following video blog
https://www.youtube.com/watch?v=UN8CZvLHTas&feature=youtu.be
We have transfer our loan from ICICI to Sbi in Jan 2010 for 8% fixed for 2 years and then floating. Now interest charged is 13.75%.. But the current interest is upto 9:30% We have filed complaint in SBI.. But they will not give any satisfactory answer.. Could you please suggest me what should I do… Could I file a complaint in banking ombudsman bcoz 3 Months are over but bank Employees just avoid it by saying that we have send your application to higher authorities..
I am assuming that you received home loan sanction letter with interest rate mentioned on the same. As your home loan is sanctioned in Oct 2016 and interest rate is applicable as on date of sanction. Therefore, in my opinion your Home loan interest rate will be 9.25%. Under MCLR, the interest rate is fixed for 1 year for SBI home loan.
Why at all call it floating rate of interest if the customer has to make a request for change of interest rate. And charging conversion fees is nothing short of extortion.
Isnt this deceit and cheating in terms of Section 420 of Indian Penal Code.
Basic and simple difference between fixed rate and floating rate must be privilege of enjoying the revised rate of interest. If a borrower does not make a request for change in the interest rate then despite obtaining a home loan on a floating rate of interest, the borrower ends up being on a fixed rate of interest all through the tenure. This is fraud.
The interest rate under floating interest home loan change only if there is change in the benchmark rate i.e. MCLR/Base Rate/RPLR/BPLR of the bank/HFC. The markup/spread/discount remain fixed for home loan tenure.
I came to know about conversion lately. I have availed home loan of 46k from HDFC bank for which the pre-emi’s are on the run for now. They are asking for 5.7k for conversion. I have 2 questions:
1) Will there be any impact of converting my loan to new rates (9.65 is what they are claiming from 9.8) since i am paying only interest as of now. Also there will be new budget coming up in feb, so will it be beneficial to do it now or should i wait and convert in one go.
2) Will it be intelligent to move my home loan to sbi? (are conversion rates applicable in sbi also)
Thanks,
Rachit
1. Your interest outflow will reduce. You can wait for 3-6 months
2. I don’t think so
Thanks Sir
Hi Nitin,
I had taken a housing loan from ICICI Bank for 22 Lacs in Jan 2014 at 10.25%. Current ROI is 9.5%. Please advise when all ICICI Bank reduced ROI from 2014 onward for existing customers and at what rate? I would like to check whether they transferred the benefit to my Loan or not?
Thanks,
Krishnan
You may check the same from ICICI bank. I cannot keep track of same.
Hi Ji,
I had taken a housing loan from HDFC for 38L in Oct-2016 at 9.40% for 25 years or 300Months.for new customers they are giving 8.6% , hence i asked for a reduction.
They said they have 2 offers
1) From march 9.25% will be the new interest rate
2) or i need to pay Rs.5750 and my ROI will be reduced to 8.7%.
Which is Good ?
A)Is it worth to pay Rs.5750 and proceed or go with 9.25% ?
B)If i need to choose Rs.5750 then
Current EMI is 32937
After conversion EMI will be 31644
Current completed months 6 out of 300
After conversion remanining months will be 258
do i need to go for EMI reduction or Month Reduction , which will be benefit ? i dont have any nearby plan to repay
kindly reply ASAP. bcoz they said monday is last date.
You may avail the conversion offer and keep the EMI same.
Ji, If so What is the benefit apart from month reduction? Could you please explain briefly
Your interest outflow will reduce.
Hi Nitin,
I have availed an home loan of 54Lakhs at 9.40 ROI from HDFC last year with monthly EMI of 46671. Now ROI goes down Axis bank is offering me 8.50% with no processing fees. Now, when i asked HDFC for LOA and other documents they agreed to covert ROI to 8.6% with conversion fees of INR 5760 and my EMI will come to 44300. Now, if calculate my balance amount on 53.5 lakhs with 8.6 through EMI calculator EMI comes to 43520. Why there is difference in EMI which EMI calculator is showing and which HDFC is saving will be? What will be more benefical for me considering i want to reduce my monthly EMI amount. Please advise?
You may continue with HDFC Ltd. Reg difference in EMI, you may check with HDFC Ltd.
If my ROI is MCLR + 0.40 and the MCLR itself reduces from 9.1 to 8.6, do I still have to pay conversion fees? (i.e., even if the spread remains the same?)
Or does that happen automatically without fees?
No. The interest rate will reduce by 0.5% automatically on next reset date.
I had taken resident home loan-variable rate 1850000 rupees from HDFC ltd. in sept.2016 at 9.40% for 10 years or 120 months. Current EMI is 23838 rupees. In 01-March- 2017 automatically update new interest rate 9.25%. Now they offer me pay conversion fees 3075 rupees and reduces interest rate 9.25% to 8.6% with new EMI 23206 rupees. Can i go with conversion fee offer or wait till next interest reset date 01-june-2017? Can they update automatically interest rate 8.6% in 01-june-2017 ?
sir, please give me reply as soon as possible.
Thank you.
The interest rate depends on the applicable RPLR. You may wait till 01-Jun-2017 before availing conversion fee offer.
Thank you very much sir,
current spread -6.90%,Balance term 113 months,current ROI 9.25%,Next reset date 01-june-17 expected ROI shown 9.25% in my home loan account.
Can they update 8.6% ROI automatically without paying conversion fees next reset date 01-June-2017?
Thanks
No. It will reset to 9.25%
Thank you sir,
It means on next reset date 01-june-2017 expected ROI should be less then 9.25%.
may be 8.90% or 9.10%?
Yes if HDFC ltd decide to cut the RPLR else it will be 9.25%.
Hi Nitin, I’m one of the unfortunate SBI base rate borroweer. my current rate of interest is 9.5%and SBI wants .35% of total as fee to change. Is it as per the norms? how much can I negotiate.
You can negotiate up to 0.25%. There are no set norms.
Hi Nitin,
I have loan with HDFC Ltd, mother branch is Gurgaon. I recently shifted to Pune and applied for reduction of Interest rate from 9.80 to 8.5. HDFC Pune branch charged me Rs 7090, where as my friend who had invested in same project and also loan amount is almost same, HDFC Gurgaon charged him INR 575 only. Its a huge difference, when I discussed with my mother branch, they said it can not be reversed now.
I applied for conversion in Pune on 25 March , cheque cleared on 30 Mar
My friend applied in Gurgaon Branch on 2-Apr and hey paid only 575
I know few people who paid only 2300 on 24 March.
Can you pls guide how I can fight to get my money back.
There is no uniformity and i feel cheated.
Thanks
Ayush
It is at the discretion of the financial institution. It cannot be disputed. I understand your concern but unfortunately it is the truth.
Dear Nitinjee, I have a maxgain loan from SBI for an u/c property . Will the bank entertain a balance transfer request prior to handover & registration ?
Yes. Bank cannot refuse but sometimes they tell buyer that it is not possible before possession.
dear Nitinji
i have loan with PNB Housing finance with rate of interest 9.75 while current rate of interest for new customer is 8.90
i have loan for 25 year for Rs.11.36 lac
want to do conversion by fees 0.50% or balance transfer to other bank
You have not mentioned the revised interest rate offered by PNBHFL after payment of conversion fees. Secondly, interest rate offered under balance transfer by the bank of your choice.
axis bank floating 8.70%
PNB Housing finance 9 % after conversion fees
Hi Sir,
I have a running home loan with outstanding of 7lacs and 3years tenure left over. As interest part is very less now, there is no major tax benefit. I want to take another home loan. Is there way of taking second home loan which can payoff the remaining amount of first loan and I will have only one to take care in future. Please guide.
Thanks,
Abhijeet Mitkari
It is not feasible. Bank will not disburse to close the existing home loan.
Hi Nitin,
Is it advisable to switch a home loan in HDFC from 8.9% to 8.6% with a switch over fee of Rs.1962. Remaining term is 93 months and emi will be reduced by Rs.201. So, total interest saved is Rs.18693. Thank you for your time.
You may go ahead. Good to know that you did financial calculation before taking decision.