Prepayment penalty on home loans to vanish soon

2011-12-30 18:01:20

Floating home loan borrowers felt relieved with the banks agreeing to abolish the penalties for prepayment. According to RBI, the floating home loan takers constitute, one third of the total home loan takers. This decision was taken after a meeting between the RBI and Indian Banks' Association (IBA) on Friday

Banks earlier charged 2-4% of the loan amount outstanding as a prepayment charge from home loan customers. According to RBI about 95% of the floating loan borrowers have faced rate hikes 13 times before coming to a stop. With the increasing RBI rates, banks have been raising home loan interest rates, which raised the equated monthly installments of borrowers.

"Banks overcharge their existing customers and the prepayment penalty prevents them from moving to cheaper competitors," says Harsh Roongta, chief executive of "This will facilitate movement of customers and remove a major financial hurdle. Lenders will now either have to drop interest rates for existing customers or risk losing them."

The top three home-loan providers, HDFC, ICICI and State Bank of India have already removed the penalties for prepayment. This abolishing prepayment penalties was one of the 10 action points adopted by banks at the annual conference of banking ombudsmen in Mumbai in early September to improve customer service.

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