Ban on prepayment fees by RBI brings a sign of relief to the Consumers

In a move that is aimed to improve customer services, banks and RBI mutually agreed to ban prepayment fees on floating rate home loans. This recent development definitely comes as a breather for those walking the tightrope of paying the EMIs (equated monthly installments) on home loans.

The issue had become controversial as many banks were charging as high as 2 per cent of the outstanding loans if the borrower wished to repay before the due date. With this development, however, the customer is certainly not complaining. It will end the tyranny of home loan companies as switching to cheaper loans will become easier, who works with an MNC and had opted for a home loan on the floating rate basis. It provides a customer more leverage and prevents arbitrary basis point increases in home loans. “What’s more, it also allows one to deploy surplus to close loans, which means interest saved is interest gained.”

It is widely believed that this new proposal will be helpful to customers who want to prepay part or whole of their outstanding loan amount. Earlier, a lot of people would avoid prepayment because of the penalty associated with it. However, now it gives the customers a lot of advantages. “For one thing, the prepayment amount is deducted from the principal so this leads to lesser interest taken from you. At the same time, you have the option to adjust the tenure. The tenure of the loan would come down according to the amount of prepayment by keeping the EMI the same. Or if the EMI is putting pressures on your monthly finances, you can also alter the EMI amount and retain the same tenure.

Additionally, at times in a bid to attract newer customers, housing finance companies would disburse loans at a lower interest rate than to existing customers. “However, going forward this may not be possible as an existing customer who pays a higher rate can borrow new loan at a lower rate and prepay the existing loan without any charges. For example: A Rs 30 lakh loan for 20 years, a 50 basis points (bps) hike in interest rate would mean an increased EMI of around Rs 1,000 per month. "It makes sense for an existing customer to go for a new loan even if the new loan is available at 50 bps lower interest rate than his existing loan. Thus, this new rule will help curbing this practice”.

This will help customers to prepay the principal amounts and interest fluctuations can be reduced.

According to realty experts, this move is a step forward for the residential real estate segment, and will help to offset the negative repercussions of the barrage of interest rate hikes. “The penalties that banks have traditionally attached to the prepayment of a home loan have been a long-standing thorn in the side of Indian borrowers.”

“The ban, if implemented, will act as an incentive for home loan borrowers to limit the tenure of their indebtedness, and to secure complete ownership of their homes. Genuine need and affordability continue to be the primary demand drivers in the current market context. In other words, people will invest in homes when they can afford the rates quoted by developers. The cost of home loan borrowing is the second tier of consideration - and at this level, the increased attractiveness of floating interest rates will certainly make a difference.”

On the other side it is also observed that that the general attitude among customers is to not to opt for a long-term loan. Although banks disburse 80 per cent of the cost of a home loan, however, in reality almost 95 per of individuals chip in with 50 per cent of self fund and the rest of the amount from the bank. Also, most customers prefer to repay their 15-year home loan in the seven to eight years only.”

We hope that with this new development, the cost of funding will come down. Also, more people will be keen to opt for a home loan. This is definitely a good thing for home loan seekers.

News exerted, complied from reliable sources & leading News papers by
-      Adv. R. P. Rathod.