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Conversation Schemes Of Home Loan

Our lifetime dream is to own a house that brings a sense of security to the family members. To achieve this dream we borrow a home loan from Banks/ NBFC’s where we have to repay the loan amount along with the interest amount. While borrowing we look after many factors such interest rates, loan amount, prepayment charges etc.

Do you also have a home loan and do you also face the fear of rising home loan interest rates which give you sleepless nights? However, there is no reason why you should not worry too much about this.

We do not ask you to give a break to your long-saved investments to prepay your home loan amount and get rid of your EMI’s(equated monthly installments) completely.

Rather Banks/ NBFC’s and other financial institutions have different schemes that allows you to lower the interest rates on floating rate home loans by paying an extra fee known as Conversion Fee.This can happen if the market lending rates fall or have swift changes. You can also shift to a new lender for the balance transfer who will offer you the home loan at a lower interest rate. But also keep in mind that the Banks/ NBFC’s or any other financial institution does not do this for free. They charge a processing fee to transfer your loan from the old lender to the new one.

Mudrahome is here to tell you more about the ‘conversion schemes’ offered by the Banks/ NBFC’s.

Concept: conversion scheme

If you are paying more amount as an interest than what new customers pay on their home loans than you can easily move to the lower bracket of interest rates by paying an extra amount as a fee to your current lender. Most of the Banks/ NBFC’s charge 25-50 basis points (bps) of the outstanding home loan amount to calculate the conversion fee.

Conversion Scheme Facilities

  • The home loan applicant has to submit a requesting letter for the conversion.
  • The conversion rate will be offered to the existing customer of the Bank/ NBFC and other financial institution. However, this is subject to the condition of good repayment track record (RTR) of minimum 1 year.
  • The rate of interest will be applicable on the prevailing interest rate based on the outstanding home loan amount. In no case the interest rate will go below the prevailing rate of interest.
  • The earlier changes in the  terms and conditions of the home loan can be extended to the borrower due to conversion scheme and most of the lenders convey this through an official document. This official document consist of all the details of existing and proposed terms and conditions for the home loan. The changes has to be acknowledged by the home loan applicant to confirm the acceptance.
  • The home loan borrower will be informed about the necessary changes in the future EMI, Interest rate, linking of different home loan accounts etc.
  • It is always advisable for everyone to understand the applicable conversion charges so that the borrower do not end up paying more towards the loan amount.
  • At times, lenders propose to lower the conversion fees for selective and deserving cases.
  • The credit officer will verify and confirm as per the eligibility to the proposed offer according to the eligibility criteria after doing an eligibility assessment.
  • The home loan applicant have to sign an acceptance  letter in order to switch the base rate also.Known as Marginal Cost of Fund Based Lending Rate (MCLR) system.

Quick tips

  • If your home loan is left for a short tenor then you should not choose to switch to avail a lower rate of interest. This is because this does not make financial sense as you will pay an extra fee i.e. the conversion fee for the remaining tenure of five years or less. By choosing transferring your loan to a new lender,you may end up paying somewhat lower EMIs, but there will be a huge difference in the overall cost of the loan.

Before you made a decision it’s important to compare what is more justifiable in terms of savings – sticking to your current lender by paying a conversion fee OR shifting to a new lender by paying a processing fee. If you get an option where the new lender waive off the processing fee, you can always take a step for transferring your home loan i.e. Balance Transfer of home loan.

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