Home conversion loans are loan schemes that have been designed for those individuals who have already acquired a home loan through a bank or any other financial institution that deals with home finance. Home conversion loans are available to all home loan borrowers, and enables them to make a move to a lower rate of interest or alter the interest spread on their current loan. Borrowers tend to opt for home conversion loans due to the fluctuating rates of interest prevalent in the market, which has a tendency to adversely affect outstanding dues on home loans. Intimations from the Reserve Bank of India with regards to home loan rates tend to drive up the EMI amount that a borrower makes towards his or her loan, or tends to raise the tenure of the borrower’s home loan. In either scenario, a sizeable bridge begins to appear between the rate of interest on the borrower’s home loan and the rate of interest prevalent in the market.
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Benefits and Advantages of Home Conversion Loan Scheme:
There are a number of benefits and advantages that a home loan borrower can avail of should he or she look to adopt the home loan conversion scheme:
- Through home loan conversion, borrowers who are looking to purchase or acquire a brand new home from the same bank can transfer the outstanding home loan amount on their existing loan to the new loan they apply for. In other words, they can use the outstanding amount of their previous loan to help acquire the new loan
- By transferring the outstanding amount on their previous loan to the new loan, they get the benefit of paying of the consolidated loan at the new rate of interest, which will be lower than the interest rate of their previous loan
- Borrowers can also opt to alter the interest spread on their loan so as to avail of lower rates on interest on offer
- The borrower can also choose to either increase the monthly repayment amount or maintain it at the same amount he or she was previously paying
- The borrower also has the option to increase the tenure of his or her home loan by lowering the repayment amount made every month
- Borrowers need not worry about prepaying their previous loan, since the loan amount will be transferred to the new one
- Most advantageous of all, borrowers will not be required to apply for a brand new loan, making it extremely convenient for them.
When Should A Borrower Choose To A Home Conversion Loan?
There are many scenarios where a borrower may opt to convert his or her home loan, depending on the individual’s needs and requirements at that point in time. Some of the most common scenarios are as follows:
- Huge Loan Tenures - If the borrower in question has an existing loan with a huge loan tenure, and is looking to take on a new home loan, then it would be in his or her best interest to opt for a home conversion loan. Home loans with long tenures mean that the borrower will be making repayments at high interest rates for a longer duration. By converting the existing loan the borrower can transfer transfer the outstanding amount to the new loan, thereby lowering the rate of interest. If the loan tenure is not of a substantial duration then it won’t make too much of a difference even if the borrower opts to convert his or her loan
- Interest Spread - If a scenario arises where the interest spread or difference between the borrower’s previous loan and the new loan on offer is substantial, then it would make sense for the borrower to go in for a home conversion loan scheme. Ideally, the difference in the rates of interest on offer should be above 1%
- High Monthly Installments - If the borrower is paying high Equated Monthly Installments (EMIs) on his or her previous loan, then opting for a home conversion loan could be a viable solution to bringing down the repayment amounts. This will help the borrower to manage his or her finances better in the long run.
- No Change In Interest Rate - If the borrower thinks that there is no possibility of the rate of interest ever reducing on his or her existing home loan, then opting to convert the loan may prove beneficial to the borrower.
Four Things Borrowers Need To Ascertain Before Opting For a Home Conversion Loan
Prior to opting to convert a home loan, borrowers need to determine a few things such as:
- Existing Market Interest Rates - Borrowers need to keep an eye on the prevalent rates of interest available in the market before opting to convert their loan. By gathering data on the best rates available, borrowers can make an informed decision on whether or not to go in for a home loan conversion
- Outstanding Loan Amount - Borrowers also need to determine how much of the previous loan is left to be paid off. If the amount is quite large then going in for a home loan conversion makes more sense than if the outstanding amount is fairly small.
- Additional Costs - Borrowers should also ascertain how much the new house will cost them in terms of any extra or additional costs and expenses. Sometimes individuals tend to overlook the fact that the purchase of new homes come with certain other expenses that are not accounted for.
- Availability of Cash - Borrowers need to ensure that they have enough cash on hand to repayments on a regular basis should they opt to convert their loan. This is absolutely necessary since conversion will result in the combination of the borrower’s previous outstanding amount with the new loan amount. This could lead to higher monthly repayments, for which the borrower will need to ensure that he has enough funds available to meet these requirements.
Tips for Borrowers to Keep In Mind When Opting To Convert Their Home Loans
While opting for a home conversion loan scheme has its advantages, there are a few things that borrowers need to keep in mind before taking it on.
- If a borrower decides to convert his or her loan, then a request letter will be required to be signed and submitted to the bank or lender the borrower is acquiring the loan from. All relevant details and signatures will be required to be entered in the application form before submission. Failure to do so will result in the loan application being denied by the bank
- Borrowers who wish to pay higher monthly repayments towards their new loan will be required to submit new cheques showing the new EMI amount if he or she was making payments for the previous loan through post-dated cheques
- Most banks levy a conversion fee or charge that could be anything between 0.5 % to 1 per cent of the amount of the home loan sanctioned. Borrowers are required to pay this amount to the bank via cheque if their application has been successfully approved by the bank and if all their documents are in order
- If the home conversion loan scheme option still doesn’t seem attractive to a borrower, it would be advisable for him or her to find out other means to close out the existing loan as early as possible.