Govt. to help home loan borrowers by making norms for prepayment of loans

The government has come forward to help home loan borrowers by making some norms so that home loan borrowers can easily prepay the loan. These norms will also make possible to shift to another scheme without having to pay a penalty.

The government is planning to make changes in the prepayment rules so that home loan borrower can easily shift to cheaper lenders if his bank raises interest rates soon after disbursing the loan.

After receiving suggestions from loan borrowers, the Competition Commission of India (CCI) has asked the banks that why prepayment penalty should not be held as anti-competitive practice.

However one can prepay home loan when his financial condition improves but the timing of prepayment of loan should be chosen carefully. Before making prepayment borrower must check how much amount of loan he can prepay with out paying penalty. Although, most banks allow loan prepayment up to a certain point without any penalty, but borrower must check that the part-prepayments do not exceed this limit to avoid a prepayment penalty.

Banks have fixed their own prepayment limit. Generally, the prepayment charge levied is two percent of the principal outstanding at the time of foreclosure and amount paid in excess of the monthly installment in the last one year. In some cases, banks do not levy any charges if the prepayment is made after three years of availing the loan and if it is from own savings.

But the penalty clause is significantly included in the contract. In fact the charges are meant for those who want to pay off a loan or move to one offering better terms. Most banks waive the penalty if the repayment is made with the borrower’s own money. In case the borrower takes a loan from other bank to prepay the existing loan then banks levy charges. It acts as a restriction for borrowers who wish to switch the lender by way of refinancing the loan when the other bank offers a lower rate of interest.

Banks say, the penalty interest is mainly to cover the bank’s notional losses incurred in finding a new borrower, and to prevent a borrower from increasing the bank’s load by returning the money. The banks say that if they allow easy foreclosure without any penal charges it may lead to asset-liability mismatch.

The Reserve Bank of India will be discussing the issue with the Indian Banking Association (IBA), a body of all commercial banks, after which it will formulate new prepayment norms including fixing the maximum and the minimum amounts that a bank may charge.

However government requires that banks should give two-month window to new borrowers to shift to some other bank without a prepayment penalty if they have raised interest rates too quickly after disbursement. The finance ministry will be discussing this matter with the Reserve Bank of India to make these changes