In a major relief to debt burdened and EMI paying borrowers, regulator National Housing Bank (NHB) directed housing finance companies (HFCs) not to levy penalty on prepayment of floating loans irrespective of the source of funds. However, borrowers with fixed rate loans can avoid prepayment penalties only if they pay from their own sources. According to NHB, 85-90% of home loans are currently on floating rate. HDFC, LIC Housing Finance, Dewan Housing Finance, PNB Housing Finance and Sahara Housing Finance are some of the 54 HFCs which account for 1/3rd of the home loan market in India. HFCs have been told to comply with this directive with immediate effect. Stocks of these HFCs took a nosedive on fears of loss of income from such charges and due to early loan pre-closures.
In addition, NHB has also advised the HFCs to ensure that both the old and the new borrowers, with the same credit / risk profile, pay the same interest rate irrespective of when the loan was availed. It has to be seen if the HFCs heed such advice as there’s no penal action for non-compliance in this matter.
Banks and HFCs generally charge 2-5% prepayment penalty on home loans depending on the type (fixed vs. floating) of loans and source of funds. A few weeks ago, RBI had expressed a similar view that prepayment penalty on floating loans should end. As the risk of rate fluctuations is borne by the borrower in case of floating rate loans, RBI ombudsmen found no rationale for pre-closure charges for floating rate loans. However, no directive in this regard has been sent to the banks till date. Banks may sooner or later have to adopt the same policy in order to compete with the HFCs. The current practice of prepayment penalty discourages the borrower the opportunity to take the benefit of better rate being offered by other lenders because the prepayment penalty amount negates the benefits which a borrower could get due to difference in interest rates. Just like mobile number portability, risk of losing a customer will force the HFCs to offer the best possible services and rates to retain existing customers.
As far as fixed rate loans are concerned, there are very few full tenure fixed rate loans being offered by HFCs or banks. It was only a few days ago that Axis Bank introduced cheapest fixed rate home loan at 11.75% for a 20-year tenure. These loans will still attract prepayment penalty unless its done from own source of funds.
Thank you NHB for the great Deepavali gift!