Switching fee: Home loan borrowers at housing finance companies cry foul

By: |
June 10, 2020 8:35 AM

While processing and switching fees have been considered a regular practice for years now, the new repo-linked pricing regime being followed by banks has brought the stark difference in rates into relief. Banks have already started to reap the benefit of this regime in the form of a larger number of borrowers transferring their loans to them.

It is a standard practice for HFCs, and even banks, to charge their borrowers for switching to a lower rate. 

Home-loan borrowers with housing finance companies (HFCs) have of late been receiving communications from their lenders telling them that they must shell out a fee in order to avail the benefit of falling interest rates.
In the meantime, the large rate differential between some non-bank lenders and banks has led to borrowers shifting their loans to the latter as the transmission at banks is much faster under the repo-linked rate regime.

Several borrowers of Housing Development Finance Corporation (HDFC) have taken to Twitter to complain about the fact that they were asked to pay a fee — around Rs 5,900 in one instance — in order to switch to a lower interest rate. Some borrowers of LIC Housing Finance also told FE that they had received a similar communication from their lenders with the HFC charging a one-time fee of Rs 10,000 to allow borrowers to reset interest rates.

An HDFC spokesperson said that it charges a fee only when a borrower wishes to change their spread, while the reset in the underlying retail prime lending rate (RPLR) happens automatically every three months. The fee for changing spreads ranges between Rs 2,500 and Rs 5,000, excluding taxes, he added.

Other lenders, too, said that it is a standard practice for HFCs, and even banks, to charge their borrowers for switching to a lower rate. For instance, PNB Housing Finance charges 0.5% of the amount outstanding plus taxes for conversion of the interest rate, while offering a discount in some cases on considerations of the borrower’s conduct.
“In some loan contracts there can be a clause that the lender can alter the terms and conditions and charge a fee. Even if such a clause is not there and the borrower is trying to shift to a lower rate of interest against the contracted rate, that itself becomes a new contract,” a senior executive with an HFC said.

Adhil Shetty, CEO, Bankbazaar.com, explained that a change in interest rates outside the rate-reset cycle translates into a refinance transaction, which effectively means you are paying off your existing loan with a new loan.  “As a consumer, there are two ways you can approach this. One, you can refinance your loan with your existing lender. In the other, you can refinance with a third-party institution, but in both cases it’s a home loan transfer,” Shetty said.

While processing and switching fees have been considered a regular practice for years now, the new repo-linked pricing regime being followed by banks has brought the stark difference in rates into relief. Banks have already started to reap the benefit of this regime in the form of a larger number of borrowers transferring their loans to them.

“Loan transfers from NBFCs to banks was the pattern in Q3 and Q4 of FY20, but things slowed down with the lockdown. But in the days to come, the flows will be more because nobody wants to continue paying such high rates,” said a senior executive with a large state-owned bank.  Much of the transfers came from companies like Indiabulls Housing Finance, DHFL and IIFL Home Finance, he said, as these lenders had interest rates much higher than banks.

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