What Is a Conversion Fee in Home Loans and When Should You Pay It?

Summary

If you already have a home loan but feel that your interest rate is too high, there’s a simple way to bring it down without switching banks. It’s called a conversion fee. By paying this small fee, your lender may allow you to reduce your loan’s interest rate and bring down your EMI. But how does it work, when should you pay it, and is it really worth it? In this blog, we explain the conversion fee for home loan, how it affects your EMI, and when it makes financial sense to use it.

Key Takeaways

• A conversion fee lets you reduce your interest rate on an existing home loan
• It is a one-time charge paid to the bank or NBFC
• Lowering your rate can save money on interest and EMIs
• It’s different from loan transfer or refinancing
• You should compare the cost of the fee with the savings on your loan

Table of Contents

1. What Is a Conversion Fee in a Home Loan?
2. Why Do Banks Offer Interest Rate Conversions?
3. How Much Is the Conversion Fee?
4. When Should You Consider Paying the Fee?
5. How Does It Affect Your EMI and Total Interest?
6. Conversion Fee vs Balance Transfer
7. Things to Check Before You Pay
8. Final Thoughts
9. FAQs

1. What Is a Conversion Fee in a Home Loan?

A conversion fee for home loan is a one-time charge that you pay to your existing lender in order to lower your interest rate.

When interest rates in the market drop, new customers often get lower rates — but old borrowers may still be paying higher rates. Instead of switching lenders, you can pay a small fee and ask your bank or NBFC to revise your rate.

This is also called:

• Interest rate conversion fee
• Rate reset charge
• Loan repricing fee

2. Why Do Banks Offer Interest Rate Conversions?

Banks and housing finance companies offer this option to:

• Retain existing customers who might otherwise shift to another lender
• Stay competitive with new lending rates
• Provide relief to customers during falling interest rate cycles

For borrowers, this is a faster and easier alternative to refinancing the loan.

3. How Much Is the Conversion Fee?

The fee varies by lender, but it is usually:

• 0.25% to 1% of the outstanding loan amount
• Or a flat fee, like ₹5,000 to ₹10,000
• Plus applicable GST

Example:
If your outstanding loan is ₹20 lakh and your lender charges 0.5%, the conversion fee = ₹10,000 + GST.

4. When Should You Consider Paying the Fee?

You should consider it if:

• Your current interest rate is 0.5% or more higher than the current market rate
• You still have 5 years or more left in your loan tenure
• You want to lower your EMIs or total interest outgo
• You don’t want to go through the full loan transfer process

Avoid it if your remaining tenure is very short, or the rate difference is too small to make an impact.

5. How Does It Affect Your EMI and Total Interest?

Even a small drop in interest rate can lead to major savings.

Example:

• Loan amount: ₹30 lakh
• Tenure: 20 years
• Current rate: 9% → New rate after conversion: 8%
• EMI drops from approx. ₹26,992 to ₹25,093
• Total interest saved: ₹4.5 to ₹5 lakh over the loan period

Always ask your lender for a comparison sheet before and after conversion.

6. Conversion Fee vs Balance Transfer

If your lender’s new rate after conversion is close to what other banks are offering, paying the fee is simpler than a full transfer.

7. Things to Check Before You Pay

• Rate after conversion: Confirm the final interest rate
• Break-even point: Months needed to recover the fee through EMI savings
• Remaining tenure: If short, savings may be limited
• Loan type: Applicable for floating rate only
• Hidden charges: Ensure full transparency

Ask your lender for a written quote with the new interest rate and recalculated EMI.

8. Final Thoughts

Paying a conversion fee for home loan is a smart move if your interest rate is high and you still have several years left on your loan. It’s a one-time cost that can bring down your monthly EMIs and total interest — without the hassle of moving to a new bank. But always do the math first. Compare the fee against the savings and decide what’s best for your financial situation.

9. FAQs

Q1. What is a conversion fee in a home loan?
It’s a fee paid to your current lender to reduce your existing home loan interest rate.

Q2. Is paying a conversion fee worth it?
Yes, if the rate drop is significant and your loan tenure is long enough to benefit from the savings.

Q3. How often can I pay a conversion fee?
Some lenders allow it once a year; others may have flexible rules. Check with your bank.

Q4. Does conversion affect my credit score?
No. Since you stay with the same lender, there’s no impact on your credit score.

Q5. Can I pay the conversion fee online?
Yes, most banks allow online requests and payments through internet banking or mobile apps.

Q6. Is this better than a balance transfer?
If your lender offers a competitive rate after conversion, it’s easier and cheaper than switching to another bank.

Q7. Can I negotiate the conversion fee?
You can try. Some banks offer fee waivers or discounts to retain customers.

Q8. Will my EMI automatically reduce after paying the fee?
Yes, once the new rate is applied, your EMI or tenure will be adjusted accordingly.