Penalty waiver an incentive for prepaying home loan
Home loan borrowers have something to cheer this Diwali.
The National Housing Board (NHB) has barred housing finance companies (HFCs) from charging prepayment penalty on floating rate home loans. A prepayment penalty can be charged in case of fixed rate home loans, but not if the borrower is paying from his own sources.
The housing board has also directed HFCs to maintain uniformity in floating rates between new and old borrowers. Banks typically charge prepayment penalty when borrowers transfer the loan to another bank. However, some banks used to charge penalty even when borrowers pay it from their own pocket.
The levy has long been in the news for its inherent anti-borrower nature. It has been an irritant particularly for borrowers wishing to prepay a home loan by procuring a loan from another bank that offered better rates.
Banks typically charge prepayment penalty when borrowers transfer a loan to another bank. However, some banks used to charge penalty even when the borrowers prepaid from their own pockets.
The banking ombudsman gets a large number of complaints from borrowers on prepayment penalty, which has been as high as 4% in some cases.
The NHB decisions, which took effect on October 19, will cover all HFCs including LIC Housing Finance. HDFC, however, has not been very enthusiastic on this so far. The Indian Banks' Association (IBA) has also requested the RBI and the NHB not to do away with it completely.
The regulators, however, feel differently. RBI states in its assessment that a floating rate loan already factors the fluctuating interest rates. Hence it doesn't make sense to charge prepayment penalty. The RBI has allowed banks to charge prepayment penalty on fixed rate home loans though. This takes care of interest rate risk that banks face in fixed rate home loans. Another major grouse of home loan borrowers is the difference in floating rates charged to existing and new borrowers, which amounts to punishing loyal customers. This, too, did not make sense, save for the fact that banks needed to maintain administrative tasks.
These steps are part of the program that RBI is planning to implement to improve customer services at banks. There have been concerns in the past several quarters regarding the practices of banks on loan disbursement, prepayment, and rate differentials, and mismatch between change in float rates and change in policy rates.
The RBI and IBA have been working on a comprehensive plan to improve customer service at banks based on the review of complaints received from customers. We will see more such steps soon.
RBI and IBA are also working on a few measures, which will make banking much easier, such as a process to resolve ATM disputes, fixed rate home loans, getting tax certificates directly from a central authority to your home address, regular loan statements from banks and many more.
We will ignore the bankers' point of view. Their argument about mismatch of maturity of loans in case of prepayment has merit only in respect of fixed rate home loans. RBI's decision to eliminate prepayment penalty on fixed rate home loan in cases where the borrower pays from his or her own sources is open to debate and hence, the bankers' request to reduce the prepayment penalty and not do away with it completely can be considered.
However, leaving any room for prepayment penalty on floating rate home loans has the potential to bring the situation back to the high prepayment era. It is better to completely eliminate it.
Home loan borrowers have something to cheer this Diwali.
The National Housing Board (NHB) has barred housing finance companies (HFCs) from charging prepayment penalty on floating rate home loans. A prepayment penalty can be charged in case of fixed rate home loans, but not if the borrower is paying from his own sources.
The housing board has also directed HFCs to maintain uniformity in floating rates between new and old borrowers. Banks typically charge prepayment penalty when borrowers transfer the loan to another bank. However, some banks used to charge penalty even when borrowers pay it from their own pocket.
The levy has long been in the news for its inherent anti-borrower nature. It has been an irritant particularly for borrowers wishing to prepay a home loan by procuring a loan from another bank that offered better rates.
Banks typically charge prepayment penalty when borrowers transfer a loan to another bank. However, some banks used to charge penalty even when the borrowers prepaid from their own pockets.
The banking ombudsman gets a large number of complaints from borrowers on prepayment penalty, which has been as high as 4% in some cases.
The NHB decisions, which took effect on October 19, will cover all HFCs including LIC Housing Finance. HDFC, however, has not been very enthusiastic on this so far. The Indian Banks' Association (IBA) has also requested the RBI and the NHB not to do away with it completely.
The regulators, however, feel differently. RBI states in its assessment that a floating rate loan already factors the fluctuating interest rates. Hence it doesn't make sense to charge prepayment penalty. The RBI has allowed banks to charge prepayment penalty on fixed rate home loans though. This takes care of interest rate risk that banks face in fixed rate home loans. Another major grouse of home loan borrowers is the difference in floating rates charged to existing and new borrowers, which amounts to punishing loyal customers. This, too, did not make sense, save for the fact that banks needed to maintain administrative tasks.
These steps are part of the program that RBI is planning to implement to improve customer services at banks. There have been concerns in the past several quarters regarding the practices of banks on loan disbursement, prepayment, and rate differentials, and mismatch between change in float rates and change in policy rates.
The RBI and IBA have been working on a comprehensive plan to improve customer service at banks based on the review of complaints received from customers. We will see more such steps soon.
RBI and IBA are also working on a few measures, which will make banking much easier, such as a process to resolve ATM disputes, fixed rate home loans, getting tax certificates directly from a central authority to your home address, regular loan statements from banks and many more.
We will ignore the bankers' point of view. Their argument about mismatch of maturity of loans in case of prepayment has merit only in respect of fixed rate home loans. RBI's decision to eliminate prepayment penalty on fixed rate home loan in cases where the borrower pays from his or her own sources is open to debate and hence, the bankers' request to reduce the prepayment penalty and not do away with it completely can be considered.
However, leaving any room for prepayment penalty on floating rate home loans has the potential to bring the situation back to the high prepayment era. It is better to completely eliminate it.
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