Existing borrowers can opt for loan conversion

From a very harrowing hike spree last year that lead to nearly 13 interest rate hikes in 18 months the situation became stable only this year.

Many banks made changes to their interest rate in the recent past without altering the actual base rate, which meant only new home loan borrowers got the benefit of a lowered interest rate of the floating interest rate home loans and not the old borrowers.

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Even this situation is likely to see some relief with SBI cutting down its actual base rate a couple of days ago by 25 basis points to 9.75 per cent from the original 10 per cent. Other banks may follow suit.

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However in the current scenario, existing borrowers who wish to shift to a lower interest rate do have options to seek a change in their predicament.

They could make a home loan switch to a bank that is offering a lower interest rate, provided they do their due diligence and confirm that the shift will indeed amount to significant savings in interest.

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Alternatively, they also have the option of opting for a loan conversion for a particular fee within the same bank to obtain the new interest rate new borrowers enjoy. Check if your bank or HFC has this option.

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Let us consider an example of how this works: Manoj took a loan from a housing finance company in November, 2008. Post the rate hikes, he is currently paying a loan interest rate of 14 per cent on his current outstanding loan amount.

On the basis of the good repayment track record his bank agrees to his request for a loan conversion option but for this he needs to pay a loan conversion fee.

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Banks usually charge a percentage of your outstanding principal amount as the conversion fee. The minimum percentage of your outstanding principal amount that is usually charged as fee is 0.5 per cent-1 per cent.

The higher the spread between the new interest rate and the old interest rate, the higher the conversion fee that needs to be paid to the bank.

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In case of a significant difference in spread, banks also calculate it in the following manner - by charging the consumer one half of the spread percentage of the outstanding principal amount.

Let us understand how much Manoj paid as loan conversion fee: He took a loan of 30 lakh on November 1, 2008, for loan tenure of 20 years at an interest rate of 11.75 per cent. His current interest rate is at 14 per cent and outstanding loan amount is Rs.28 lakh.

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Let's assume the new interest rate he converts to in September 2012, is 10 per cent. The difference in spread between the two interest rates is four per cent.

The percentage at which his loan conversion fee will be calculated on his current outstanding loan amount is ½ of four per cent which is two per cent.

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Loan conversion fee = two per cent of 28 lakh = Rs 56,000. If you are an existing borrower like Manoj, who wishes to opt for loan conversion, discuss your options with your bank or HFC right away.