Check these 7 important charges in your home loan agreement that can make your debt more costly
Jan 7, 2026
Synopsis
Homebuyers in 2026 should look beyond interest rates and scrutinize loan agreements for other charges like processing fees, prepayment penalties, and bundled insurance. These costs can significantly inflate your total loan burden. Understanding and negotiating these fees can save you lakhs over your home loan tenure.
If you are buying your first home in 2026 or transferring your home loan and are focusing more on comparing interest rates across banks, you may be overlooking the hidden charges in your loan agreement that could drain lakhs from your pocket.
"Look beyond the headline rate," advises Adhil Shetty, CEO, BankBazaar.
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Processing fees, penalties on delayed EMIs, rate conversion or reset charges, and mandatory add-ons such as bundled insurance can materially increase the total cost. Prepayment and foreclosure clauses deserve close attention, particularly when charges apply. Borrowers should ensure these charges are clearly defined and not left to lender discretion, Shetty adds.
Let’s discuss how these charges can inflate your total loan burden and what can you do to avoid or reduce them.
1. Upfront costs: Processing, legal and statutory fees
Every home loan journey begins with processing fees, legal and administrative costs. These are the charges that lenders levy for evaluating your application, verifying documents, and conducting credit checks.
Lenders impose several initial charges that many first-time buyers overlook.
Processing and administrative costs: These include costs related to application evaluation, credit checks, documentation and application fees, upkeep and maintenance charges.
"Processing fees typically range from 0.25% to 1% of the loan amount and are often capped," explains Shetty.
Legal and technical verification: Lenders conduct professional valuations to verify that your property has a clear title and to evaluate its actual market value.
These can range from Rs 5,000–Rs 15,000, says Atul Monga, CEO & Co-Founder, BASIC Home Loan.
Stamp duty and registration: These are statutory charges that vary from state to state and are calculated based on your property's value. While not controlled by the lender, they're a significant upfront cost you must budget for.
In case of zero-fee offers, borrowers should negotiate ancillary costs such as legal fees, valuation and technical charges, documentation costs, MODT, and administrative fees, says Shetty.
2. Prepayment penalties and conditions: The cost of paying off early
Prepayment and foreclosure clauses come into play when you want to pay off your loan early either partially or fully.
Under RBI guidelines, floating rate home loans cannot have prepayment charges. However, fixed-interest-rate and hybrid-interest-rate home loans can attract penalties typically going up to 4% of the outstanding principal amount.
“When a borrower makes part prepayment, lenders usually reduce the loan tenure and keep the EMI unchanged. This results in higher interest savings over the long term. That said, borrowers do have an option to request for a lower EMI instead and hence it is important to get clarity on this option in advance,” says Monga.
Therefore, you must ensure that you not only check the quantum and condition of prepayment but also how it will impact your future EMIs and overall interest outgo.
3. Conversion charges when switching interest rate regimes
Market conditions change, and you might want to switch from a floating to fixed rate (or vice versa) during your loan tenure. Lenders offer this flexibility through conversion facilities, but they come at a cost.
Conversion fees typically range from 0.25% to 0.5% of your outstanding loan amount, according to Monga.On a Rs 40 lakh outstanding balance, that's between Rs 10,000 and Rs 20,000.
"Conversion options allow borrowers to switch to a lower interest rate or rate regime, depending on the market conditions," explains Monga.
"Lenders usually charge a conversion fee, up to 0.50% of the outstanding loan amount. There may also be a cap on the number of conversions and cooling off periods available."
Before exercising a conversion option, calculate whether the interest rate differential justifies the conversion fee. Sometimes, it's more economical to continue with your existing rate.
4. Balance transfer costs: When to switch lenders
A few years into your home loan, you might receive offers from other lenders for balance transfers at lower interest rates. However, as with switching interest rate regimes, it may not always be a good idea to jump at such an opportunity.
“A balance transfer works only if the interest rate gap is meaningful and service terms are clearly better,” says Shetty.
Beyond the low interest rate, the new lender may have the same initial charges such as processing fee, legal and valuation charges, MODT charges etc. There might also be a foreclosure penalty on your old loan if it was on hybrid or fixed rate regime.
5. The avoidable cost of delayed payment
A delayed salary, a medical emergency, or simply forgetting your EMI due date can trigger late payment charges that can go up to 3% of your overdue EMI per month, which may vary depending on the lender.
"Most of the lenders offer an extended grace period of 5-10 days after the due date before they levy penalties," says Monga.
Moreover, the bank may also levy bounce charges. Beyond the immediate financial hit, delayed EMI payments damage your credit score, potentially affecting your ability to secure loans in the future. Ensuring sufficient funds in your account and setting up auto-debit is the most straightforward solution for this avoidable cost.
6. Forced insurance selling
Insurance is another area where borrowers often lose money unknowingly. There are two major types of insurance when it comes to home loans:
Property insurance: Your property is the lender's collateral, and they need assurance it's protected against fire, natural disasters, and other damages.
Loan protection insurance: This is a term insurance policy that repays your loan if something happens to you.
"Property insurance is usually mandatory; loan protection insurance is optional," clarifies Adhil Shetty. "Disputes arise when lenders bundle single-premium insurance into the loan without clear consent. Borrowers are free to choose their own insurer or opt for a separate term plan, subject to lender requirements."
You're not bound to your lender's insurance partner. Shopping around for competitive insurance quotes can save you significantly over your loan tenure.
7. CERSAI charges: A small fee for big protection
One charge that typically confuses most first-time buyers is CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India).
"CERSAI charges cover the registration of the mortgage in a central database to prevent multiple loans on the same property," says Shetty.
The charges are straightforward:
Loans up to Rs 5 lakhs: Rs 50 + GST
Loans above Rs 5 lakhs: Rs 100 + GST
While the fee is nominal, its purpose is critical.
"After loan closure, borrowers must ensure the record is updated as satisfied. Any delay should be escalated immediately, as pending entries can block resale or refinancing," advises Shetty.
While differences in interest rates can save you lakhs over your loan tenure, so can negotiating a lower processing fee, avoiding bundled insurance, or understanding your prepayment options.
Your home loan agreement is a long-term financial commitment that deserves careful scrutiny. Read every page of your loan agreement, ask questions about every charge, and calculate your total cost before making your decision. If you are buying your first home in 2026 or transferring your home loan and are focusing more on comparing interest rates across banks, you may be overlooking the hidden charges in your loan agreement that could drain lakhs from your pocket.
[The Economic Times]
