The competition Commission of India, a statutory body whose role is to promote competition and protect interest of customers ruled that banks and housing finance companies are justified in levying prepayment penalty on foreclosure of home loans. Despite the ruling, all is not lost for home loan customers who want to prepay. In fact there are ways through which one can avoid prepayment penalty.
View of lenders:
Banks and HFCs justify levying prepayment penalty as they believe is needed to maintain a balance between deposits and credit and such charges provide certainty about the cash flow. Some HFCs argue that even the National Housing Bank(NHB), the regulator of housing finance companies, charges prepayment penalty if they decide to prepay their liabilities earlier than the stipulated time frame.
The general practice:
Prepayment charges vary from lender to lender. While some banks such as Axis banks Ltd. and IDBI Bank Ltd, do not levy any prepayment penalty only if another bank is taking over the loan. Usually he charges vary from 1%-5% and longer the loan tenure, lower will be the rate of interest.
But you can still be hopeful, since, in a guideline issued in 2010, NHB prohibited HFCs from charging prepayment penalty in a case a borrower is funding the deal from his own source. This should be proven by you, in your bank account statement. If the loan amount to be prepaid is borrowed from family or relatives, make sure that it is done through cheques. This will ensure enough transparency on your behalf in claiming the right source of funds.
Steps to be taken
Every customer has the right to waive off the prepayment penalty imposed by the bank through right negotiating ability by the customer. Tr looking out for those lenders who do not charge a heavy prepayment penalty if in case your are bound to prepay the loan amount. Transfer the loan amount to another lender only if the repayment tenor of 10-15 years is left. Else, baring the average prepayment penalty of 2%, will make your gains to a negligible figure.