The prepayment penalty that is applicable when the borrower decides to pay back in advance a portion of the home loan in order to reduce the interest burden in the long run is a matter concern in all home loans. The banks stand to lose their earning in terms of interest on the borrowed capital which is why they try to discourage prepayment of any kind of loan by incorporating clauses such as the prepayment penalty.
RBI and NHB on Prepayment penalty of Home Loans
Both the Reserve Bank of India as well as the National Housing Bank is against the policy of banks charging prepayment penalties on home loans. Both the bodies have issued directive in this regard to all housing finance companies. However at present the ban on prepayment penalty charges is applicable only for home loans that floating or adjustable interest rates and not on the conventional fixed rate home loans which form the majority of home loans in the country.
Tips to avoid Prepayment Penalties
Here are a few practical points which can help avoid or even reduce to some extent the prepayment penalties that the banks levy of the customers.
Negotiate: This is the first step towards prepayment of a home loan whether in whole or partially. The borrower has to discuss and negotiate hard with the lending institution to waive of the prepayment penalties applicable on the home loan. Reasons such as high interest rates and affordability of the loan are justifiable and the banks will find it logical to help out the borrower by permitting partial prepayment, extension of tenure or lowering of Emi rather than ending up in default of repayment situation.
Switch to Floating Rate: Certain banks permit the switching of a home loan from fixed to floating rates in between the repayment period. This is permitted as the floating interest rates are usually a bit lower than the fixed interest rates. Thus prior to prepaying your home loan one must try to switch over first. Once the home loan is changed to a floating rate type then the bank cannot take any prepayment penalty in case the prepayment has to be made in full or partially.
Make partial Prepayments: In certain cases the home loan borrower can approach the bank to permit him to make a partial prepayment of the outstanding amount in order to reduce the net amount on which a high rate of interest is being charged. The banks may permit up to 25% prepayment of the outstanding amount in one go without any penalty being charged thereon. The customer may again attempt to make another prepayment of up to 255 of the now outstanding amount after some intervening period.
Prepayment from Own Source: Prepayment or foreclosure of an outstanding from the borrower’s own sources does not invite any prepayment penalty from the bank. But the onus of proving the source as being his own lies on the borrower. Sources such as maturity of policies or sale of other properties or assets are acceptable means to prepay a home loan without any penalty.
The home loan requires repayment over a period which may be as long as two decades. Thus the borrower must make all calculations carefully while deciding on the amount and tenure of the home loan so that there is no unnecessary EMI burden in between.