22 MARCH, 2022

Home loan interest rates are often the most talked-about subject for home loan borrowers. As interest rates are a crucial component of the home loan repayment, you must understand all its aspects before applying for one.


Interest rates do not remain the same during the entire tenure. There are changes in the interest rates due to their type and also due to the benchmark rates through which they are linked.


You can convert your interest rates when you transfer your loan. It could be done in the following situations:

  • When you switch to floating interest rates from fixed interest rates.
  • When you switch to different benchmark rates like a base rate to MCLR, etc.


Before You Avail a Housing Loan, You Must Understand Some Aspects of Interest Rate Conversion and Its Impact. Take a Look.


Types of Interest Rates

Home loans are charged on two different interest rates - fixed and floating. Fixed interest rates, as the name suggests, are constant for the entire tenure. They are not affected by the economic policies, and the borrowers have the assurance of fixed EMI throughout their tenure. However, the fixed interest rates are slightly higher than the floating interest rates. Lenders charge a higher rate to cover the risk associated with the interest rate fluctuations.


On the other hand, floating interest rates are subject to changes based on the market rates. Floating interest rates are pegged at a benchmark rate, currently, the RLLR. These benchmark rates are modified by the government, which reflects in the borrowers' interest rates. 


You can convert your interest rates by transferring your loan from one lender to another. Also, if your lender offers a reset clause in your agreement, they can convert the interest rates after a few years in the tenure. However, you need to pay the conversion charges to switch from fixed to floating interest rates.


Conversion of Benchmark Rates

Similarly, interest rate conversion is also based on the benchmark rates they are linked with. When you switch to a new benchmark rate, there is a change in the duration in which the effect of repo rate cuts reaches the borrowers. Allegedly, under base rates, the lenders did not pass on the benefit of repo rate cuts to customers or did it with a considerable time lag. However, with BPLR and MCLR, borrowers enjoyed quicker transmission of home loan interest rates.


When there is a change in the benchmark rates, the banks are supposed to give the borrowers an option to switch to the new benchmark rate or stick to the old one.


When Should You Switch From One Benchmark To Another?

If you find that switching to the new rate is helping you save on interest costs, you can switch with the same bank or a different bank. However, you must know that switching to MCLR or RLLR subjects your interest rates to more volatility.


If you have a home loan at floating interest rates, there could be significant changes in your EMI over the tenure. Therefore, you must be aware and updated on the significant policies by the Reserve Bank of India to make an informed decision for your home loan.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.