What Is A Home Loan Prepayment Fee?

Home loans are characteristically of high value, and these are refunded through a long repayment span, better identified as long tenure. In most cases, home loan occupancy spans between 20 and 30 years. During this period, if the borrower were to save money and strategies to use it to lower his EMI burden, would they have to pay any fee to the bank to benefit from the home loan prepayment facility? Let us discover the answer to that question.

A borrower may or may not have to pay a home loan pre-payment fee, liable on one main factor. If his loan is linked with a detached rate of interest, the bank can’t charge a pre-payment fee under the strategies issued by the Reserve Bank of India (RBI).

“A reference is requested to Part B of the First Bi-monthly Monetary Policy Statement 2014-15 publicized on April 1, 2014, signifying certain measures for consumer protection. It was designated that in the interest of their consumers, banks should consider permitting their borrowers the possibility of prepaying floating-rate term loans without any penalty. So, it is advised that banks will not be allowed to charge foreclosure charges/ pre-payment penalties on all floating rate term loans authorized to separate borrowers, with immediate effect,” the RBI said in a notification distributed on May 7, 2014.

Financial institutions can custody a pre-payment penalty in the following conditions:

• If the home loan is related to a fixed rate of interest.

• If the home loan is associated with a mixed rate of interest.

• If the home loan is occupied by companies.

Banks may charge anywhere between 0.5% to 3% of the unsettled principal amount as the prepayment fee in cases where they are permissible to charge this levy. Banks would also try to device the source of the funds while determining the prepayment penalty.

Private lender ICICI Bank, for example, charges 2% on the unresolved loan amount from debtors to offer the ability with fixed interest rate.