Banks raise home loan rates after RBI repo rate hike: Want to move back to lower-interest loan? Know this hidden cost

The RBI increased the repo rate by 25 basis points to 5.50% on October 7. Changes in the repo rate can directly affect repo-linked loans, prompting banks to revise their lending rates.

Recently, India’s biggest PSU bank, State Bank of India (SBI), has increased its benchmark lending rates by 25 basis points (bps), raising borrowing costs for home loan customers whose interest rates are linked to these benchmarks.

The revision, effective 15 October 2026, increases the External Benchmark Linked Rate (EBLR) to 8.15%, up from the existing rate of 7.90%.

Many existing home loan borrowers may want to switch to lower interest rates. However, there is a hidden cost to switching even within the same bank: conversion charges.

What conversion charges do banks levy?

Siddharth Maurya, Founder & Managing Director, Vibhavangal Anukulakara, said banks may impose a conversion or repricing charge in case the home loan customer wants to get a lower interest rate through alteration of the relevant spread or changing of schemes.

Kapil Makhija, COO at MinEMI, said banks typically charge 0.25% to 0.50% of the outstanding principal, plus GST, although some levy a flat fee. For a home loan with an outstanding balance of ₹60 lakh, a 0.5% conversion fee would amount to ₹30,000.

HDFC’s official schedule specifies a conversion charge of 0.25% of the outstanding principal, capped at ₹5,000 plus applicable taxes, for certain fully drawn home loans. Kotak Mahindra Bank charges 0.5% of the outstanding loan amount, capped at ₹10,000 plus taxes, for switching between floating-rate schemes on certain housing loans, Maurya added.

Can all borrowers negotiate a lower rate with their existing bank?

Makhija said floating-rate borrowers broadly can; it is their right to ask, and banks usually do. Fixed-rate loans generally cannot be repriced this way.

Apply through the bank’s app, website or branch, pay the fee, sign a supplementary agreement, and the spread on your loan is reset to what the bank offers new customers today, he added.

Can a lower interest rate increase the remaining loan tenure?

Yes, it can be. Maurya said this will depend on how the lender uses the new interest rate and which repayment option is chosen by the borrower.

Makhija said the real damage happens when rates rise. Banks keep the EMI unchanged and quietly extend the tenure. If your cash flow allows, keep the EMI unchanged and let the lower rate shorten your tenure instead. That is where the largest interest saving sits.

For a ₹50 lakh home loan with a 20-year repayment period, the total interest cost under each scenario can be compared as follows:

• Before the rate hike: At 8% interest, the EMI is approximately ₹41,822, and the total interest payable over 20 years is around ₹50.37 lakh.
• If the tenure remains unchanged: At 8.25% interest, the EMI rises to approximately ₹42,603, and the total interest payable over 20 years increases to around ₹52.25 lakh.
• If the EMI remains unchanged: At 8.25% interest, continuing to pay ₹41,822 per month could extend the tenure to approximately 21 years. The total interest payable would rise to around ₹55.33 lakh, an increase of around ₹4.96 lakh over the original loan.

What other charges can apply?

Makhija said borrowers should account for 18% GST on the conversion fee, documentation or service charges for the supplementary agreement, and any applicable stamp duty.

A separate fee may also apply if the borrower switches from the MCLR or base-rate regime to an external benchmark, although some banks combine the charges.

Should you switch to a lower-interest-rate loan?

Nikhil Mawale, Co-Founder and CEO of PropertyDrone Realty, said lower interest rates can offer relief to households stretched by housing expenses and other EMIs. However, conversion fees, taxes and changes to the repayment schedule can reduce the benefit.

Hardik Shah, Director of Shyam Group–Dholera SIR, said the gains will depend on the time left on the tenure and the repayment terms of the bank.

Makhija suggested asking the existing bank for a conversion quote and comparing it with a balance-transfer offer from another lender. An internal conversion with the same bank is generally cheaper and faster because it avoids a fresh legal or valuation process.

Disclaimer: This is for informational purposes only. Please consult a financial expert and your bank before making a decision.