Home loans are typically of high value, and these are repaid through a long repayment span, better known as long tenure. In most cases, home loan tenure spans between 20 and 30 years. During this period, if the borrower were to save money and plans to use it to lower his EMI burden, will they have to pay any fee to the bank to avail of the home loan prepayment facility? Let us find the answer to that question.
Is there a penalty for home loan pre-payment?
A borrower may or may not have to pay a home loan pre-payment fee, depending on one main factor. If his loan is linked with a floating rate of interest, the bank can’t charge a pre-payment fee under the guidelines issued by the Reserve Bank of India (RBI).
“A reference is invited to Part B of the First Bi-monthly Monetary Policy Statement 2014-15 announced on April 1, 2014, proposing certain measures for consumer protection. It was indicated that in the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty. Accordingly, it is advised that banks will not be permitted to charge foreclosure charges/ pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect,” the RBI said in a notification issued on May 7, 2014.
When can banks charge a pre-payment penalty?
Financial institutions can charge a pre-payment penalty in the following conditions:
- If the home loan is linked with a fixed rate of interest.
- If the home loan is linked with a mixed rate of interest.
- If the home loan is taken by companies.
What is the pre-payment penalty in such cases?
Banks may charge anywhere between 0.5% to 3% of the outstanding principal amount as the prepayment fee in cases where they are allowed to charge this levy. Banks would also try to gauge the source of the funds while deciding the prepayment penalty.
Private lender ICICI Bank, for example, charges 2% on the outstanding loan amount from borrowers to offer the facility with fixed interest rate.
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