Home >opinion >online-views >Freedom from prepayment fee

Freedom from prepayment fee

Freedom from prepayment fee

Taking an aggressive stance, the Reserve Bank of India (RBI) has decided that banks cannot levy foreclosure charges or prepayment penalty on home loans on floating rate. The order is to be implemented with immediate effect.

In a circular issued on 5 June, RBI warned banks to strictly follow the instructions brought out in its monetary policy statement for 2012-13. The apex bank thinks that removal of foreclosure charges and prepayment penalty on home loans would reduce rate discrimination between existing and new borrowers and competition among banks and hence result in finer pricing of floating rate home loans.

The story so far

After the last policy rate cut in April, lending rates came down on various types of retail loans. A lot of banks reduced their base and benchmark prime lending rates (BPLR), making home loans slightly cheaper. For instance, Federal Bank Ltd reduced its base rate by 20 basis points, while Kotak Mahindra Bank Ltd, ICICI Bank Ltd and IDBI Bank Ltd reduced their base rates as well as BPLR by 25 basis points each.

What can existing home loan borrowers do?

Switch: If you are an existing home loan borrower, you can take the advantage of the waiver of prepayment penalty by switching to a lower rate loan.

While switching, remember to take into account the total cost of the old loan and the new loan. Says Ranjit Dani, a Nagpur-based certified financial planner, “When you switch the loan, take into account the cost of switching. Getting a lower interest rate is important, but also look at the processing, legal and documentation charges of the new lender. Only if you save money after taking into account all the charges, go for switching the loan." Many lenders charge a fixed processing fee of Rs5,000-10,000 and switching may work in such cases.

Negotiate with your bank: Another option is to ask the current lender to reduce your interest rate. Your bank may be willing to offer you a slightly lower rate, since it may not want to lose you as a customer, especially if you have been a good borrower and have been regular with your equated monthly instalments.

Housing finance company (HFC) customers: Those who have a floating rate home loan from an HFC already enjoy the benefit of paying no prepayment or foreclosure charges since the National Housing Board barred such charges last October itself.


Subscribe to newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperLivemint.com is now on Telegram. Join Livemint channel in your Telegram and stay updated

My Reads Logout