Banks charge special fee for slashing interest on home loans

Kochi: Some banks are charging customers a specific fee for changing the higher interest on home loans availed earlier to lower rates.

The additional burden is applicable to those who opt for a fixed interest rate while availing the loan. The fee charged is not uniform across banks.

The State Bank of India (SBI) has been charging Rs 5,950 irrespective of the loan quantum. Meanwhile, Canara Bank and a few others had discontinued charging the ‘switching fee’ six months ago. Some others have been charging 0.1per cent of the remaining repayment amount.

Earlier, banks used to convert the interest type for those who had availed home loans at a fixed interest rate of 8.5 per cent or 9 per cent to a lower variable rate.  Some banks used to charge for the conversion of the rate, while some others did it for free. Currently, the floating/variable interest rate is below 7 per cent.

Converting the fixed rate now would reduce the interest by more than 2 per cent, and the reduction would be reflected in the monthly repayment instalment as well. SBI had ended the fixed interest rate type in 2016, and adopted the floating rate, and in 2018, moved on to the repo-linked lending rate (RLLR) in 2018.

RLLR is an external benchmark, which the commercial banks employ to calculate the retail loan interest rate based on the Reserve Bank of India’s repo rate. The interest rate will fluctuate according to the change in repo basic points.

Several banks are charging a fee for converting previously availed home loans on fixed rate to floating rate and from marginal cost lending rate to RLLR. SBI demands a fee of Rs 5,950 for both along with the application.

Why switching fee?

Why do certain banks charge the customer for changing his/her home loan interest type? Banks say the loans and investment management wing has calculated the revenue from each loan and the expenses on interest to be provided for investments made in the institution. When the loans were approved earlier, the interest on fixed deposits was high. But while changing to a lesser loan interest regime, banks suffer a revenue loss, and to make up for this loss, a small fee is charged from the customers. 

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