There is something to cheer about for home loan borrowers even in this high interest rate regime. After housing finance companies (HFCs), banks have finally started scrapping prepayment penalty charges, both for the new and existing customers. While the big two, State Bank of India and ICICI Bank, waived off such charges with immediate effect, other banks are expected to follow suit soon.
Pre-payment penalty is an amount charged by a lender when the borrower prepays the outstanding amount before the end of the loan tenure. Some banks do not charge a penalty if the outstanding is paid through “own sources of funds”, while few others charge anywhere between 0.5 per cent to 2 per cent depending whether it is paid from own source or it is re-financed. Banks were so far resisting any proposal to scrap pre-payment penalty, claiming it would lead to asset-liability mismatch. On the other hand, the Reserve Bank of India (RBI) was putting pressure on banks to stop this practice for quite some time now.
Zero penalty means there would be no charge if one decides to shift the balance loan amount to some other lender also known as re-financing. Pre-payment charge is used as a client retention tool to discourage borrowers to move to other lenders which may offer better interest rate for transferring the outstanding amount. Pre-payment charge puts limitation on the number of choices a customer can have due to the market competition.
Last month, National Housing Bank (NHB), which regulates housing finance companies (HFCs) like HDFC, LIC Housing Finance and Dewan Housing Finance, issued a circular which directed them not to charge pre-payment penalty on floating rate home loans (made through any source) or pre-closure done on fixed rate home loans through own sources.
No comments:
Post a Comment