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No More Penalty on Prepayment of Home Loan

A penalty charged by banks while you prepaid your home loan has always been a sore point for home loan takers.

Now, the Reserve Bank of India (RBI) has abolished this prepayment penalty.

Read on for full details.

 

The Prepayment Penalty for Home Loans

A home loan is the biggest loan for most of us, and most of us like to pay it back as soon as we can.

Therefore, many of us prepay some of the loan when we have some decent amount of cash to spare – for example, when we get a bonus.

So far, almost all banks had been charging a “prepayment penalty” (also called foreclosure charge) for any home loan about that you prepaid. This was in the range of 2% of the amount prepaid.

Basically, you were being charged a fee for being financially prudent – you were charged for being nice and paying back the loan before time!

 

The RBI Directive

RBI has decided to step in and has asked all the banks to stop charging this prepayment charge or fee from its customers – and this is a great news for us.

Till now, some banks did waive off this prepayment fee, but they had been selective – for example, some banks only waived it off for new customers.

Now, thanks to the RBI directive, all banks would be forced to discontinue the practice of charging a prepayment penalty.

 

What Does this Mean for You?

Well, this definitely is good news for you.

  1. Whenever you prepay your home loan, you would not be charged a prepayment penalty. Thus, you would be saving money.
  2. It would be easier to switch your home loan provider – if you find better interest rate and terms with another bank, and your bank is not willing to change the rate for your home loan, you can now switch to another bank more easily. No prepayment charge means one less thing to worry about!

 

Some Things to Note

  1. This abolishment of prepayment penalty is applicable only for floating rate home loans. However, since most loans disbursed after 2005 are floating rate, this should be applicable to a vast majority of home loans.
  2. This change would come into effect immediately (5th June 2012)

 

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