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Pre-payment penalty on home loans a history now

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In a huge relief home to loan borrowers, the Reserve Bank of India has barred commercial banks from levying foreclosure charges on all floating rate term loans with immediate effect.

The RBI made the announcement through a press statement to this effect recently.

With that, doing the complex calculations on what your bank might charge you as penalty for foreclosing a loan account has become a thing of the past. The same is also true of all small-big bank borrowings availed on floating rate of interest.

Conventionally, the banks have been slapping huge penalties on such foreclosures as premature closures or shifting of home loan accounts to other banks eats into their potential interest earnings.

The RBI has told the banks that they can longer charge any pre-payment charges to customers on floating rate term loans. It also restrained them from charging as much as two per cent of the outstanding amount as penalty for foreclosure.

“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 statement said.

Customers tend to pre-pay (foreclose) their loans when they find that the interest rates on their term loans have risen. Some customers also foreclose their loans with existing banks to switch to other banks who offer loans at relatively lower rates.

The RBI had earlier also said that the banks cannot discriminate between a new and an old customer by offering two different interest rates.

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