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Nuances of Home Loan Interest Rate Conversion You Should Know

Highlights

  • Do you know you can change the interest rate during the course of your home loan?
  • Read here how you can change from a fixed to a floating rate and within the different benchmarks of the latter

Lower interest rates are sought across loans and more so in home loans. The scope for interest payment is much more in a home loan due to its longevity and average ticket size. While the loan can run for as long as 20-30 years, the average ticket size can be as much as INR 30 lakh-50 lakh. Not only the rate should be lower but you also need to choose the right lending rate benchmark to keep the interest payment in check.

Broadly, home loan interest rates are offered on a fixed and floating basis. In a floating interest regime, there are different benchmarks – base rate, MCLR and RLLR – to be aware of. Not only lenders charge on shifting from fixed to floating but also when you shift within different benchmarks of the floating rate regime. This article will not only tell you the charges applicable to rate conversion but also demonstrate why it is important to convert rates. Let’s begin!

Fixed vs Floating – Which is Better and Why?

While fixed rate loans don’t see any change in interest rates throughout the tenure, the floating rate will have different interest rates at different points of time due to the changes in market conditions. This will mean a different interest outgo for each of the two. Even as the fixed rate doesn’t see any variation in the interest rate, the extent of interest outgo can be much more than in the case of floating loans where the interest rate changes with time. Fixed rate home loans are disbursed at around 3%-4% higher than that of a floating rate. So, converting into a floating rate from a fixed rate could lead to significant savings for you. An example will help you understand better.

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Example – A home loan of say INR 50 lakh is offered at 8% and 11% on a floating and fixed rate, respectively, for 20 years. How much will be the difference between the two in terms of repayment? Let’s find out!

Repayment AspectsFloating Rate LoanFixed Rate Loan
Loan AmountINR 50,00,000INR 50,00,000
Interest Rate8% Per Annum11% Per Annum
Tenure20 Years20 Years
EMIINR 41,822INR 51,609
Interest OutgoNR 50,37,281INR 73,86,261

Both EMI and interest outgo are significantly lower in a floating rate loan. The floating rate figures are estimates and the eventual outgo numbers will most likely differ. But the interest savings could still be substantial there if history and trends are to be believed.

Charges Applicable on Conversion from a Fixed Rate to a Floating Rate

So, if you are servicing a home loan on a fixed rate regime, you can think of switching to a floating rate. However, that will incur a one-time fee which you can see in the table below.

LendersConversion Charges
State Bank of India (SBI)INR 5,000
HDFC LimitedAs Applicable
ICICI Bank1.75% of the principal outstanding
LIC Housing Finance (LIC HFL)INR 10,000
Punjab National Bank (PNB)As Applicable
PNB Housing Finance (PNBHFL)0.50% of the principal outstanding
Axis Bank2% on the drawing power
Kotak Mahindra BankAs Applicable
YES BANK0.50% of the principal outstanding

Note – The conversion fee will also include the applicable Goods and Services Tax (GST), which presently stands at 18%.

Which Floating Interest Rate Benchmark is the Best of the Lot?

As stated earlier, the floating rates are benchmarked to base rate, Marginal Cost of Lending Rate (MCLR) and Repo-linked Lending Rate (RLLR). All these rates are subject to the change made by the RBI. But not every benchmark follows the same in the same proportion. For example, the base rate, which is the oldest of the three, is poor when it comes to transmitting the lower rates in response to the cut made by the RBI in the repo rate. MCLR is better than the base rate in terms of rate reductions, but not to the tune of the rate cut of the RBI. However, when the RBI was raising the repo rate to contain inflation, banks were quick to raise their base rate and MCLR in the same proportion.

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For example, Since October 2019, the RBI has slashed the repo rate by 100 basis points to 4.40%, including a massive 75 basis point cut made on 27th March 2020. (100 basis points = 1%) This resulted in a just around 60% drop in the lending rate of MCLR-based home loans. Base rate loans witnessed even lower reductions. But the newest of all i.e. RLLR of banks witnessed the exact fall i.e. 1% in response to RBI’s take on the repo rate. Plus, the spread over the respective RLLR of the bank will remain fixed throughout the tenure, unless there’s a significant change in the credit profile of an applicant. Given the present situation, the repo rate will go down further, easing the RLLR-based lending rates much more than the other two. So, if you’re servicing the home loan under base rate or MCLR, ask the lender to switch it to the RLLR benchmark and save on the interest payment. The lender will charge a fee for the same which you can see below.

Conversion Charges When Switching a Home Loan from Base Rate or MCLR to RLLR

Note – The conversion fee will also include the applicable Goods and Services Tax (GST), which presently stands at 18%.

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  • Home Loan Interest Rates September 2020
    Axis Bank7.75% - 8.55%
    Bank of Baroda7.00% - 8.40%
    Citibank8.20%
    HDFC6.95% - 8.00%
    ICICI Bank6.95% - 8.05%
    Indiabulls Housing Finance Limited8.80% - 11.05%
    Kotak Bank7.20% - 9.30%
    LIC Housing6.90% - 7.90%
    Piramal Capital & Housing Finance9.00% - 9.10%
    PNB Housing Finance8.60% - 9.45%
    Reliance Home Finance8.75% - 14.00%
    State Bank of India/SBI6.95% - 7.60%
    Tata Capital9.20% - 9.35%