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hidden costs
home loans

Hidden costs on Home loans

This article presents a number of hidden costs on home loan that one is often charged off, unknowingly. They might overlook these points in the process of obtaining of a home loan.

These hidden costs raise the price of the property and the buyer ends up shelling out a lot more money than planned.




Conversion Fees


Conversion fees are the most common hidden cost at all.

One pays conversion fees when they wish to change their type of loan. During their loan tenure, they are free to opt for a change in the type of interest rate, that is, from fixed to floating rate or vice-versa. They can also reduce the fixed interest rate to the prevailing one. For example, when Mr. X applied for the loan, the interest rate was 11% fixed. But over time, it reduced to 10.50%. Mr. X could reduce his fixed interest rate to the existing one by paying the conversion fee!
But , in order to avail the change in interest rates, conversion fees to be paid ranges from 0.5-1% of the outstanding loan amount. Let’s note that.




Processing and Administration Fees


As the name itself is self-explanatory, these charges are levied to cover the cost of processing and administering the loan. Usually it comes under the head of ‘Processing Fees’ but some banks charge these separately.

These costs are imposed at the time of application and are non-refundable, even if the loan is not sanctioned. Banks usually charge up to 1% of the loan amount as fees. Most banks quote a maximum of Rs. 5000/- only, while some have schemes which offer no processing charges whatsoever. With good negotiation one can reduce the processing fees, as well. Click here to read about Home loan provider in India.




Document Retrieval Charges


On the application of a loan, one is to submit all their important documents to the bank. The bank deposits these important documents to a central storage unit to assure their safety. This secure storage is called the Central Document Repository (CDR). The bank charges an amount at the time of total repayment to transfer these documents from the repository to the borrower. These charges are sometimes included under processing costs.



Memorandum of Deposit of Title Deed (MODC)


Mortgage is a property used by the borrower to secure the lender’s loan. The loan provides the money to buy a house and the loan is guaranteed by that house.
The borrower uses the MODC as a legal undertaking that proves he has deposited the title documents by his own will to the lender. In case the borrower is unable to make the full payment, the lender can claim the rights of the property using this deed as proof. The government levies stamp duty of 0.1%-0.2% of the loan amount to register the document, which is retrieved from the customer.


Legal and Technical Fees


Most of the National, State and International banks have a team of legal and technical experts who are to undertake the process of verification of documents. Certain Banks such as SBI outsource agents who take care of such legal obligations. Technical experts are appointed to verify and inspect the property that the borrower provides as mortgage. The banks charge a fee for these legal and technical services. Sometimes, they are included in the processing cost. These charges can, however, be reduced by negotiation.


 hidden costs

Late Payment Fees


On delayed payment of EMI, financial institutions can ask the borrower to pay a fine. Banks charge a late payment fee of at least 2% interest per month.



Prepayment Penalty


Doesn’t this sound rather silly?
If one can pay off the loan before the end of the loan tenure, either completely or in parts, this is considered prepayment of the loan and the bank can charge them for the same. The RBI has banned prepayment charges on home loans with floating rates of interest. Whereas, a prepayment charge is applicable on fixed rates of interest. The amount charged varies with each bank. Thus, borrowers are not saved even by paying off the loan earlier than said. Click here to read about Home loan prepayment option.



Resetting the Loan Tenure


Banks charge a fee to increase or decrease the monthly EMI, which results in the alteration of loan tenure. For example, if one has taken a loan of Rs. 1 crore for 60 months, then the EMI will be Rs. 1,66,667. If one want to reduce the term of the loan to 48 months, the EMI will increase to Rs. 2,08,333.
To avail this change, most banks will charge a fee up to Rs. 500/-.



Recovery Charges


If one defaults on timely payment of the loan amount, then the bank will have to go through technical procedures to recover the mortgage value. The bank recovers the cost of these technical procedures from the customer. Since each bank charges a different amount for recovery, there is no specific amount that can be determined. The amount is decided by different variables such as principle loan amount, value of mortgage, legal charges relating to recovery, etc. The total amount of recovery is borne by the borrower, according to the SARFAESI act of 2002.



Getting List of documents (LOD)


Banks take a copy of the borrower or applicant’s original documents, during the application for a loan. If one requests for a photocopy of the documents, the bank can charge a fee of Rs 2 per page to Rs 1000 for entire set.




You shouldn’t get deceived when bank agents highlight only the favorable aspects of a home loan plan. Instead, it is mandatory that one should read between the lines and examine all the details, especially the additional charges. Further, all the charges are exclusive of tax and should be added while calculating hidden charges.



Well, these were the most pinching hidden costs that one should keep in mind while applying, obtaining and availing a home loan.





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