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Prepayment Penalty on Home Loan

What Is Prepayment Penalty on Home Loan?

The regulator of home loans in India, the National Housing Board, has scrapped and abolished the prepayment penalty on home loans offered by banks and non-banking financial companies such as Bajaj Finserv, which is a relief to home loan borrowers.

According to a circular dated 19th Oct 2011, the NHB has stated that lenders should not charge prepayment penalty on home loan under the following circumstances:

   1. Where the housing loan is on floating interest rate basis – pre-closed through any source
   2. 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 safeguarding the public and not advancing the interests of lenders. In reality, the practice of prepayment penalty hindered the borrower from closing their loans before the tenure fixed by the lender was over. This in turn prevented the borrower from taking advantage of the better rate being offered by another lender, as the amount of prepayment charges on home loan negated the benefits that the borrower would get from the difference in interest rates.

With the abolishment of prepayment penalty on home loan, home loan borrowers can now switch their loans from one lender to another who is offering them better interest rates.

Also Know: What is Prepayment of Home Loan?

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