In a relief that has come to Home Loan borrowers, the Prepayment Penalty on Home Loans has been scrapped and abolished by the Regulator of Home Loans in India i.e. the National Housing Board (NHB)

The Notification for Removing Pre-Payment Penalty for Home Loans in India came on 19th Oct 2011 vide Circular No. NHB (ND)/ DRS/Pol – No. 43/2011-12 & stated that Pre-payment penalty on pre-closure of Home Loans should not be charged under the following circumstances

  1. Where the housing Loan is on Floating Interest Rate Basis – Pre Closed through Any source
  2. Where the housing Loan is on Fixed Interest Rate Basis – Pre-Closed through “Own source”
  • The expression “own sources” for this purpose means any source other than by borrowing from a Bank/HFC/NBFC and/or a Financial Institution

By notifying these new rules, NHB has initiated a step that the Reserve Bank of India has been contemplating for a while for the Removal of Prepayment Penalty on Home Loans.

Currently there are 54 Housing Finance Companies registered with NHB and this directive applies to all these 54 Housing Finance Companies which fund a major chunk of the Home Loan & Mortgage requirement in India.

The primary aim of this directive is to safeguard interest of general public and not to advance the interest of the banks. The practice of prepayment penalty was a hindrance if a customer decides in favour of making prepayment. This in turn deprives the borrower the opportunity to take the benefit of better rate being offered by any other lender, since the amount of prepayment penalty negates the benefits which a borrower could get due to difference in interest rates.

With the abolishment of Pre-Payment Penalty, Home Loan borrowers would now be able to switch their loans from one bank to the other who offers them better interest rates in the same manner as they can change their Mobile Service Operators after the introduction of Mobile Number Portability.