Good News for Home Loan Borrowers - No need to pay prepayment penalty
The announcement of National Housing Board on 19th Oct, 2011 will bring a relief to the home loan borrowers. The decisions of NHB are as follows:
a) NHB (National Housing Board) has barred the housing finance companies (HFCs) from charging prepayment penalty on floating rate home loans. In case of the fixed rate home loan, the prepayment penalty can be charged. However, in this case, if the borrower is paying from his own sources, there will be no prepayment penalty.
b) The housing board has also directed the HFCs to maintain uniformity in floating rate between new and old borrowers.
This is certainly a favorable development for the existing borrowers as well as new borrowers of home loans. These decisions by NHB will come into effect from 19th Oct,2011 itself and will cover all housing finance companies including LIC housing finance,HDFC etc.
Prepayment penalty has been in the news for quite some time because of its inherent anti-borrower nature. It was a bottleneck for borrowers from prepaying a home loan by procuring a loan from another bank that offered better rates than the existing bank. The banking ombudsman gets a large number of complaints from borrowers on prepayment penalty. The penalty was, in some cases, as high as 4%. Banks typically charge prepayment penalty when borrowers transfer the loan to another bank. However, some banks used to charge penalty even when borrowers pay it from their own pocket.
The other major complaint for home loan borrowers was the difference in float rates charged for existing borrowers and new borrowers. This was tantamount to banks punishing existing borrowers for their being customers for a longer time. This did not make any sense except that the banks would have to maintain administrative tasks to change the terms and conditions for the existing borrowers.
These steps are part of the program that RBI is planning to implement to improve customer services at banks. There have been concerns in the past several quarters regarding the practices of banks on loan disbursement, prepayment, and rate differentials, and mismatch between change in float rates and change in policy rates. RBI's decision to eliminate prepayment penalty on fixed rate home loan in cases where the borrower pays from his or her sources is debatable
Bankers' request to reduce the prepayment penalty and not do away completely with it is also valid. However, leaving any room for prepayment penalty on floating rate home loan has the potential to bring the situation back
Best Regards
Prakash Nair
