If you are an existing home loan customer, you have reason to cheer: you will not be charged a prepayment penalty and you will not be at a disadvantage in comparison with new customers. But where do buyers exactly stand to gain? A rundown.
Floating rate loans: According to a circular issued by the housing finance companies’ (HFCs) regulator, the National Housing Bank (NHB), HFCs can’t charge a prepayment penalty from customers whose loan is on floating rates even if money used to prepay the loan is borrowed from a bank or a non-banking finance company (NBFC).
Fixed rate loans: Even customers on a fixed interest rate have something to look forward to. They won’t be charged a penalty if they are prepaying from their own sources. However, if you borrow from a bank or NBFC, you may be subjected to a penalty, depending upon the HFC’s terms and conditions.
Fixed-cum-floating rate loans: If you have a fixed-cum-floating rate loan, the rules for fixed loans will apply till the time your loan is fixed and then the rules for floating loan will apply. In other words, if you don't want to pay a penalty, you will have to prepay from your own sources till the time your loan is on a fixed rate; thereafter, you may from any source of income and still not pay a penalty.
“The treatment of prepayment in such cases would depend whether the customer has prepaid the loan when rates were fixed or whether the customer prepays when rates are floating,” said RV Verma, chairman and managing director, NHB.
For instance, if you have taken LIC Housing Finance Ltd’s New advantage 5 scheme, whereby interest rates remain fixed for the initial five years and subsequently becomes floating. The prepayment clause that will apply to you would depend on whether you prepay the loan within five years or after that.
In another circular, NHB instructed HFCs not to discriminate between old and new customers. Often, in their bid to attract new customers, HFCs charge lower rates from new customers as as compared with the rates charged from old customers. According to the NHB circular, “Charging of higher interest rate to old customers against the new customers puts them to great disadvantage, besides the practice being discriminatory. The practice also generally lacks in transparency and fairness... HFCs are advised to apply uniform rates of interest to old and new borrowers who have same credit or risk profile.”
However, the new guidelines may adversely impact launch of new products, particularly during festive season. Usually, during the festive season, banks offer better deals to attract new customers, but in the future while doing so they may have to keep in mind the interests of existing customers. “We are not against any HFC launching a special product,” said Verma. “But any new product would necessarily have to provide some kind of window to existing customers, which would ensure non-discrimination.”
The Reserve Bank of India (RBI) is already contemplating such a move in consultation with Indian Banks' Association (IBA). With NHB already biting the bullet on HFCs, it is likely that the banking regulator would also opt for a similar measure.
“The issue is being discussed and IBA would convey it decision to RBI soon,” said Nagesh Pydah, chairman and managing director, Oriental Bank of Commerce. “We hope that any such move (abolishing of prepayment penalty) would happen from prospective effect and not from retrospective effect as it may lead to asset-liability mismatch for some banks.”
Already, some banks including the country’s largest lender, State Bank of India, have waived off prepayment penalty on floating rate home loans.