No more Penalty for Home Loan Pre-Payment in India

The Reserve Bank of India (RBI) is in the process of directing banks to stop charging penalties for repayment of home loans ahead of schedule to ensure a level-playing field between banks and housing finance companies (HFCs). RBI’s move follows a similar directive to Housing Finance Companies (HFCs) by their regulator, the National Housing Bank (NHB), earlier this week. The NHB notification asked HFCs not to charge pre- payment levy or penalty for pre-closure of housing loans under two situations — pre-closed through any source, where the housing loan is on floating interest rate basis; and loans pre-closed by the borrowers out of their own sources of funds, where the housing loan is on fixed interest rate basis.

The move is aimed at increasing “transparency and certainty” in the housing finance market, said NHB chairman and managing director R.V. Verma.

Banks usually charge 2-4% of the loan outstanding as early repayment charges from mortgage holders. The waiver of the advance payment penalty may encourage customers to migrate to entities that offer cheaper loans. Early repayment charges allow banks to offer competitive loan rates, analysts said. At least 95% of home loans bear a floating rate of interest, according to RBI. However, most banks do not charge a pre-payment penalty if you deposit more than your EMI payable on a periodic basis. This new proposal by RBI has had the entire industry crying foul especially the HFCs who fear an exodus of their current customers to banks which offer a lower rate of interest.

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