A prepayment penalty is a fee that lenders charge when you pay off part (part-prepayment) or all (foreclosure) of your debt before the due date or the end of the loan tenor. It is normally a few basis points.
- Where the housing loan is on floating interest rate basis – pre-closed through "any source"
- Where the housing loan is on fixed interest rate basis – pre-closed through “own source”
The expression “Own Sources” for this purpose means any source other than by borrowing from a Bank/ HFC/ NBFC and/ or a financial institution.
With the above directive, the primary aim of the NHB is to safeguard the public and not advance the interests of lenders. The practice of charging a prepayment penalty hindered borrowers from closing their loans before the tenor fixed by the lender was over. This in turn prevented borrowers from taking advantage of better rates being offered by other lenders, as the amount incurred for prepayment negated the benefits that you would get from the difference in interest rates.
With the abolishment of a prepayment penalty on home loans*, home loan borrowers can now switch their loans from one lender to another that is offering better interest rates.
Also know: What is prepayment of home loan?