While lenders in India have considerably reduced the interest on new home loans in the past 3-4 years, existing loan customers are not able to benefit from the same. This is mostly because home loans taken from banks before April 2016 are tied to Retail or Benchmark Prime Lending Rate (R/BPLR).

Banks have now switched to the new Marginal Cost of Funds-based Lending Rate (MCLR) regime which has made home loans cheaper for the customers. However, even existing borrowers do get the option to switch to this new interest regime. But a home loan conversion fee is involved in the process.
Let us have a look at how existing borrowers can switch to lower interest rate and how much is the conversion fee-

Home Loans Taken from Banks

In case you are an existing home loan customer of a bank, you can switch from base rate to the new MCLR regime. As MCLR is directly linked to the repo rate set by the RBI, the home loan interest rate generally falls every time the RBI reduces the repo rate.
But to switch to MCLR from the base rate, a borrower is required to pay a conversion fee which can be up to 2% of the outstanding principal balance.

Home Loans Taken from NBFCs

Unlike banks, NBFCs do not change their BPLR or base rate. They make changes to the interest spread, which helps in reducing the overall interest of the home loan. As MCLR does not apply to NBFCs, you can switch to a lower interest rate bracket by paying the home loan conversion charges which are generally in the range of 1.5% to 2% of the outstanding loan balance.

A major difference between banks and NBFCs here is the fact that while banks only allow you to switch to MCLR once, you can reset interest rate of home loans taken from NBFCs any number of times by paying the conversion fee.

Does Paying Conversion Fee Makes Financial Sense?

Yes and no. A borrower should calculate the total conversion fee he/she would be required to pay and compare the same with the interest savings. It is only advisable to switch to a lower interest bracket and pay the conversion fee when the savings are significant.

Also, avoid paying the conversion fee if you are already in the last few years of loan repayment. This is because you would have already paid most of the interest in the initial repayment years.
Discuss the home loan conversion option with your lender in detail and calculate the conversion fee to ensure that the conversion actually brings in considerable interest savings.

Learn more about your Home Loan Eligibility here.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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