Home Loan Conversion is one of the best ways to reduce your home loan interest rate. I recently got a query from one of the readers asking that – I am an existing borrower and my home loan rate of interest is 8.1%. The rate of interest rate declared by the bank for the new customer is 7.2%. How existing borrower can opt for a reduced interest rate? – Well, I gave two options (1) Refinance – Home Loan switch (2) Home Loan rate conversion. He opted for Home loan conversion and he could reduce home loan interest from 8.1% to 7.2%.
He approached the bank asking for Home Loan conversion. The bank offered him home loan rate conversion with a nominal fee of Rs.2950. He paid for this fee online and his interest rate is reduced. The bank offered him two options. (1) To reduce the tenure of the loan (2) To reduce monthly EMI. He opted for a reduction in loan tenure. Due to this reduction, he got the benefit of 0.9% which is applicable from Aug 2020. As per calculation, he will be able to save 5.34 Lakh and he will able to complete his home loan 2 years early.
Well, if you have opted for a large size home loan with a hefty interest burden and you are also planning to reduce your home loan interest rate this post is for you. In this post, I will explain step by step process of Home Loan Conversion.
What is Home Loan Conversion?
Home Loan Conversion is an option to reduce the applicable rate of interest on the loan. You can either change the spread or switch to another scheme. You need to pay nominal fees to opt for this facility. You can either reduce your EMI amount or you can reduce the loan tenure.
In simple words, the bank is offering a home loan at a lower interest rate to a new customer. If old customers want a loan at a lower interest rate. He/She can approach the bank for a reduction in rate by Home Loan Conversion.
In most of the cases, bank charges 0.25-0.5%, plus applicable taxes of the principal outstanding as conversion fees. This facility is offered in case of home loan is partially disbursed. In the partial disbursal case, the conversion fee is calculated on principal outstanding as well as undisbursed loan amount.
The bank is charging fees for conversion because it is one type of income to bank or HFC. Another reason for the charging fee is the bank wants to pass on this benefit to only selected customers. If all customer reduces the interest rate it will create a huge impact on the earning of bank or HFC. This means the conversion fee act as one type of entry barrier for conversion.
You need to do a proper calculation to know about the benefits of Home Loan Interest rate conversion before opting. We will do the same in the cost-benefit analysis section.
Also Read – EMI Moratorium Cost Implication – Home Loan & Credit Card
How to opt for Home Loan Conversion?
To opt for Home Loan Conversion, you need to approach bank/HFC. You can either directly get in touch with the customer care number given by the bank or HFC. Alternatively, you can visit the bank website and log in as an existing customer. You need to locate a section called Conversion Enquiry. You will find detail about your current home loan interest rate and applicable home loan interest. You can apply online via a form provided by the bank and make an online payment for the conversion fee.
In case your bank does not offer an online facility for the conversion. You need to visit the bank and submit the application along with a cheque for the conversion fees.
It generally takes one week to complete the process of conversion. The new rate of interest is applicable from next month.
Cost Benefit Analysis
Before opting for home loan rate conversion you need to do a cost-benefit analysis. You can easily do that by means of using a home loan calculator.
Let’s take one example. Suppose, you have opted for a Home loan with a rate of interest of 8.1% in January 2020. The loan amount is 32 Lakh and loan tenure is 15 years. The monthly EMI, in this case, would be Rs.31138. When you ask for Home Loan Conversion you will be given the option to reduce home loan interest rate to 7.2% by making a payment of Rs.2950.
The remaining outstanding as of today with 8.1% interest rate = EMI Amount x Tenure (in Month).
- 31138 (EMI) x 172 (Duration) = Rs.5355736 (Outstanding amount)
The above outstanding amount of calculation is considering the fact that no prepayment will be made by you.
Suppose rate of interest is reduced to 7.2% by paying Rs.2950. You have two options –
(1) Reduce tenure (EMI count) to 158 months
Revised calculation with 7.2% interest rate = EMI Amount x Tenure (in Month)
- 31138 (EMI) x 158 (Duration) = Rs.4919804 (Outstanding amount)
Total Saving = Rs.435932
The above saving is calculated considering the fact that rate of interest remains 7.2% for the rest of the loan tenure. However, it will not be the case.
(2) Reduce EMI amount to Rs.29619.
Revised calculation with 7.2% interest rate with reduce EMI and without changing loan tenure.
- 29619 (EMI) x 172 (Duration) = Rs.5094468
Total Saving = Rs.261268
This means option one would be more beneficial in this case.
You also need to look at applicable fees for the reduction of interest rate and applicable saving. If fees are higher there is no point in opting for the conversion. Another important point to check is balance tenure of your home loan. If only few years or month is pending in your home loan it is not advisable to opt for this facility, as it may turn out to be costly affair.
Myths about Home loan conversion
Few myths about home loan rate conversion are given below.
#1 Newly announced Home Loan Interest rate is applicable to old borrower automatically.
No, it is not correct. You need to opt for conversion and pay extra fees in order to get benefit of newly announced home loan interest rates.
#2 Revised rate of interest rate will be same as that of new borrower rate of interest.
It is a myth. The revised rate of interest will be decided by the bank and it will not be the same as that of new borrower. It will be generally higher compared to rate offered to the new borrower. In most of the case it is negotiable. Bank will revise the rate based on type of customer.
#3 The revise rate of interest is applicable throughout tenure of the loan.
The revise rate of interest is applicable for few months. This rate is likely to get revised based on the movement of MCLR rate.
#4 Home Loan Conversion is offered unlimited times.
Home loan rate conversion is offered only for 2-3 times during the tenure of your loan. This benefit is not given to the customer for unlimited times. This means you need to be careful while opting for this facility again and again.
#5 The conversion is only applicable on floating rate home loan
No, this is myth. This facility is extended for both fixed rate and floating rate home loan. You need to ask your bank for this facility. However, charges applicable on the fixed rate home loan for the conversion might be higher compared to floating rate home loan.
Over to you –
Have you opted for Home Loan Interest rate conversion facility?
Do share your views queries and experience in the comment section given below.