No Pre-Payment Charges Should Be Levied by Banks: RBI

Good news for home loan borrowers! The Reserve Bank of India (RBI) asked banks not to levy pre-payment charges on home loans taken on floating rates. Though some banks have voluntarily abolished penalties on pre-payment on their floating rate home loans, RBI announced its policy proposal in order to ensure uniformity across the banking system.

In its proposal, RBI noted that Damodaran Committee has observed that foreclosure charges or pre-payment penalties are levied by banks on home loan borrowers across the board. Some banks were charging pre-payment charges of 1-2% of the outstanding loans. This resulted in borrowers switching to new lenders at cheaper rates.

Thus, the decision of removal of prepayment charges on home loans will lead to reduction in the discrimination between existing and new borrowers. Also, the competition among banks will result in better pricing of home loans with the floating interest rates.

In 2011, housing finance regulator National Housing Bank (NHB) directed all housing finance companies to refrain from imposing a pre-payment penalty.