SBI and ICICI Bank end pre-payment penalty on home loans

A few weeks ago, NHB had banned prepayment penalty on floating rate home loans by HFCs such as HDFC and LIC Housing Finance. Just like we had predicted earlier, banks are now following suit in abolishing prepayment penalty on home loans. SBI and ICICI Bank have now joined the HFCs and Axis Bank in ending this practice that tormented EMI paying customers who wanted to either pre-close their loans or shop for better home loan rates elsewhere. SBI will waive prepayment penalty on both floating and fixed rate home loans, ICICI Bank will stop penalising floating rate home loans while continuing to charge 2% of principal outstanding on fixed rate home loans. This comes into immediate effect for both existing and new customers.

In the past, prepayment penalties were generally not being levied in cases where the borrower pre-payed with “own funds.” Most lenders charge 2-5% of the principal outstanding on loan pre-closure. RBI had made its stand known on this issue a few months ago in the annual conference of banking ombudsmen. RBI had pointed out that there’s no justification for levying penalty because floating rate loans pass on the interest rate risk from the banks to borrowers. It had indicated that banks can continue to charge reasonable prepayment penalties for fixed-rate loans. Most banks and HFCs continue to charge a fee on fixed rate home loans when they are not pre-closed from the customer’s own earnings.

When should you pre-close your home loan?

  • When you are flush with cash, want to be debt-free and don’t want to pay unnecessary interest on your home loan
  • There are other lenders offering better interest rates and terms on the same loan product

When not to opt for pre-closure?

  • You are better off paying the EMI if you can earn more by investing the money elsewhere when compared to the interest rate charged on your loan. This is more so with customers who availed fixed rate loans when the interest rates were lower than it is today
  • If tax savings plus interest rates on long term deposits yield higher than the amount paid as interest for the loan. Use our EMI calculator to determine the total interest payable for your loan
  • We predict that more banks will follow suit soon in abolishing pre-payment penalties to remain competitive in the lending market. If you are a customer with a bank that continues to penalise pre-closure, wait a few more days before pulling the plug on your home loan.

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