No more fine on pre- payment of home loans

HOUSING finance regulator National Housing Bank ( NHB) has directed all housing finance companies ( HFCs) to stop levying penal charges on customers for pre- payment of home loans with immediate effect.

These prepayment penal charges are levied mainly by the private sector banks and housing firms and could be as high as four per cent. The move is expected to provide relief to lakhs of home loan borrowers from HFCs.

The NHB notification asked HFCs not to charge pre- payment levy or penalty for preclosure of housing loans under two situations — pre-closed through any source, where the housing loan is on floating interest rate basis; and loans pre-closed by the borrowers out of their own sources of funds, where the housing loan is on fixed interest rate basis.

The expression 'own sources' for this purpose means any source other than by borrowing from a bank/ HFC/ NBFC and/ or a financial institution, NHB said.

"The move benefits only HFC borrowers at present. But if the move spurs the Reserve Bank of India (RBI) to follow suit, that will relieve all the borrowers, including home and auto loan borrowers, from the prepayment charges," said a personal finance advisor, who wished not to be identified.

"The pre- payment charges were restraining customers from moving around," NHB chairman and managing director ( MD) R. V. Verma said.

"It is very difficult to quantify the loss arising from the new norm. But it can only be a small component," said Darpin Shah, banking analyst, Almondz Global Securities.

However, HFCs are likely to feel more punch in the notification that seeks to maintain uniformity in rates between old and new customers." Charging of higher interest rate to the old customers against the new customers puts them ( the former) at a great disadvantage, besides being a discriminatory practice. For the growth of a healthy and sound housing finance system, it is considered necessary that pricing of the products by the lending institutions are transparent, non- discriminatory and objective," NHB said.

Typically banks and HFCs charge higher interest rate to old clients in order to attract new customers.

Already, HFCs are crying foul over the NHB moves and are seeking a level playing field with banks, which are not barred from levying pre- payment charges. " The impact of these norms will be limited if they are implemented across the financial sector. Otherwise, it will be discriminatory," said an HFC source.

Posted in: Banking.