RBI's New Rule: How Will No Prepayment Charges on Home Loans Affect You?

RBI Circular on Home Loan Prepayment Charges

RBI, via a circular dated 5.6.2012 (copy attached), has advised all banks not to levy any prepayment charges on home loans with immediate effect.

Thanks

This is indeed a very valuable input that will help many home loan borrowers from private banks.

Interest Rate Directives for Banks

How about issuing directives to banks on charging the same interest rates to existing customers as those offered to new customers? If you have such a circular, please share it for the benefit of many of us.

Thanks & Regards,
Sandeep Varma

State Bank of India announced this a while ago. Home loan borrowers of SBI can now choose base rates instead of PLR by paying some charges.

Thanks for the valuable information. Can you please confirm if the same policy applies to loans from NBFCs like HDFC, LIC Housing Finance, etc.? They claim that this directive does not apply to them.

IDBI is not charging any prepayment charges. HDFC is silently penalizing borrowers for prepayment.

Thank you!

Hi all, this is applicable to housing loans availed on a floating rate of interest. What about housing loans taken on a fixed rate of interest? Can anyone clarify?

Regards,
M.J. Subramanyam, Bangalore

This is indeed very valuable information. One of the best and most beneficial decisions by the RBI in the recent past. Thank you for posting.

Regards,
Vinay S.

Mumbai: Prepayment Penalties for Dual Rate Loans

Borrowers with dual rate loans from housing finance companies will not be able to prepay loans without incurring a penalty for early payment.

The housing finance regulator, National Housing Bank, has issued a clarification allowing lenders to impose prepayment charges wherever loans have been contracted at a fixed rate and subsequently the rate has been revised to floating.

“We are going by the nature of the loan at the time of contract. If it is a loan where the interest rates are fixed at the time of the contract, it will be treated as a fixed rate loan. On the other hand, if the loan is at a floating rate in the initial years, the norms of floating rate will apply and the borrower can prepay without any charges even if it turns fixed in subsequent years,” said R V Verma, chairman of the National Housing Bank.

Verma stated that there is no cap on the amount of prepayment penalty, but lenders are bound to disclose the charges at the time of the contract. “Competition will ensure that there are no takers for a loan if a company fixes a very high charge,” said Verma.

He mentioned that the differential in interest rates for new and old borrowers had decreased after the NHB barred prepayment charges last year.

Most dual rate home loans are switching to floating rates, and given that interest rates have risen, borrowers are discovering that their interest liabilities have increased significantly. Housing Finance Companies (HFCs) are allowing borrowers to switch to lower rates for a payment of 0.5% of the loan value. The State Bank of India is allowing home loan borrowers with floating interest rates higher than current rates an option to switch over to current rates after paying a 1% fee.

The origin of the dual rate home loan is with the stimulus package introduced by the government after the Lehman Brothers crisis in 2008 when PSU banks came out with a special rate scheme devised by the Indian Banks Association. The State Bank of India, under O P Bhatt, tried to outdo the scheme with a dual rate scheme, which was criticized by HDFC chairman Deepak Parekh as a teaser loan and a gimmick. Subsequently, HDFC came out with its own dual rate product. These products were withdrawn after the RBI frowned on them.

Source: Times of India, 9th June 2012

Thanks for the clarification. But see what Mr. R.V. Verma says, (This is what you have posted): “We are going by the nature of the loan at the time of contract. If it is a loan where the interest rates are fixed at the time of the contract, it will be treated as a fixed rate loan. On the other hand, if the loan is at a floating rate in the initial years, the norms of the floating rate will apply and the borrower can prepay without any charges even if it turns fixed in subsequent years,” said R.V. Verma, chairman, National Housing Bank.

This means that the benefit of prepayment of loan dues without any penalty will be available only to those borrowers who, at the time of availing the housing loan, chose a floating rate of interest. As such, this benefit is not available to those who chose a fixed rate of interest at the time of availing the loan. But the news says, as per your posting, borrowers are changing to a floating rate of interest to take advantage of a lower rate of interest. How is this possible? Should not the borrowers be properly educated in this regard? How are HDFC and SBI allowing this?

Regards,
M.J. Subramanyam, Bangalore

Dear friends, please find attached another circular dated 26.6.2012 issued by RBI on the subject.

Thanks