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Can I change my current loan from Floating rate to Fixed rate and vice versa?

As a home loan borrower, you are always justified in asking whether the interest rate option you have taken is the best one for you. If you want to know whether it is possible to change your loan from a floating rate to a fixed rate and vice versa, the answer is yes. However, doing so will have its own consequences. Here are some pointers you can use if you think that the home loan interest rate that you have chosen is not the right one.

Easy answers for a prospective borrower

Let’s start with the new home loan borrower first. Are you confused about whether you should opt for a fixed rate of interest or a floating rate loan? The answer is simple. It makes sense to lock yourself in a fixed interest rate when you have a clear indication from the markets that interest rates are going to go upwards. However, do bear in mind that though a fixed interest brings in an element of certainty in your monthly payout (as EMI) such home loans are at least 1-2.5% higher than a floating rate home loan and are on a fixed rate only for a tenure of 3-5 years (after which moves to floating rate again). On the other hand, if interest rates have a likelihood of going downwards, a home loan at a floating rate of interest makes more sense for you.

Two options for the existing borrower

But the above holds true for someone who has not taken a loan yet and is still weighing his options, but what if you are an existing home loan borrower stuck at a higher interest rate? You would obviously want to explore a cheaper option. There are two ways to do this. You can either reset your rate with your existing bank (Bank ABC) or go to a new banker (Bank DBE) who is offering you a cheaper rate of interest. However, this decision has to be based after you have analyzed the costs against the benefits.

  1. Resetting your loan rate with your existing bank: For instance, when you are trying to change your loan rate from a floating to a fixed one or vice versa within Bank ABC, Bank ABC will charge you a conversion fee for changing over from a fixed rate loan to a floating rate loan. The charges may be anywhere between 1.75 to 2% on the amount of loan depending upon the bank. However, if you want to change your loan from a higher floating rate one with a lower floating rate one, the charges are much lower at 0.5%.
  2. Switching to a new bank: In case you are thinking of a balance transfer to another bank, the costs could be higher if you have a fixed rate of loan with Bank ABC. While foreclosure charges have been done away with on floating rate loans, fixed rate loans still attract a penalty of 2 - 4% on the outstanding amount. Besides, you will be required to pay a processing fee to Bank DBE which may be 0.25 to 1% of the outstanding loan and an additional service charge as well.

The crux of the matter

Therefore, as is clearly visible the answer to your dilemma lies in doing the math. The take away is definitely the interest costs you save. So all this trouble is only worth it if you are getting an interest rate differential of at least 0.75-1% or more. The other thing to consider is amount of your outstanding loan and the remaining loan tenure. The higher this amount and the remaining number of years, the higher is your benefit in terms of money saved on interest costs.