Conversion Schemes In Home Loans
Do you have a home loan running? Does the fear of rising home loan interest rates give you sleepless nights? Well, there is no good reason why you should worry too much about this.
No. We are not asking you to break your long-saved investments to pre-pay your home loan and get rid of your equated monthly instalments (EMIs), for once and for all.
Banks and financial institutions have a scheme that allows you to lower interest rates on floating rate home loans by paying a Conversion Fee, if market lending rates have fallen. You can also shift to a new lender who will offer you the home loan at a reduced rate of interest. Keep in mind that lenders do not do this for free. They charge a processing fee to transfer your loan.
MakaaniQ tells you more about the 'conversion schemes' of banks.
The concept of conversion scheme
If pay more than what new customers pay on their home loans, you can also move to the lower bracket of interest rates by paying a fee to your existing lender. Most lenders charge 25-50 basis points (bps) of the outstanding home loan amount, for calculating the conversion fee.
Conversion Scheme Facilities
- The home loan applicant requesting conversion must submit a letter.
- The rate conversion offer will be given to the existing customer, though this is subject to the condition of good repayment track record (RTR) of at least 1 year.
- The applicable rate of interest will be the prevailing rate of interest based on the home loan amount outstanding. In no case will the rate of interest go below the prevailing rate of interest.
- Changes in earlier terms and conditions of the home loan extended to the borrower due to conversion scheme by most of the lenders is conveyed through an official document. This official document will have details of existing and proposed terms and conditions. The changes need to be acknowledged by the home loan applicant.
- The home loan borrower will be informed of the necessary changes in the EMI, rate of Interest, home loan account linking etc.
- It is advisable for you to understand the applicable conversion charges so that you do not end up paying more.
- At times, lenders propose lowering your conversion fees selectively for deserving cases.
- The officer will verify and confirm that you are eligible to the offer according to the eligibility criteria will do an eligibility assessment.
- The home loan applicant will have to sign a letter in order to switch to the base rate (now called Marginal Cost of Fund Based Lending Rate -MCLR) system.
- If your home loan is outstanding for a short duration, then you must not choose to switch to a lower interest rate. This is so because this does not make financial sense. You will pay an extra fee (i.e. the conversion fee) for, say, the remaining tenure of five years or lower. You will end up pay somewhat lower EMIs, but there will be little difference in the overall cost of the loan.
- Compare what is more justifiable in terms of savings - sticking to the existing lender by paying a conversion fee OR switching to a new lender by paying a processing fee. If the new lender waives off the processing fee, you must go for transferring your home loan (i.e. Balance Transfer of home loan).