Prepayment penalty on floating rate / dual rate home loans
In a major relief to home loan borrowers who have taken dual rate home loans which have fixed rate component in initial years and then converted to floating interest rate, also known as teaser loans, the NHB (National Housing Board) has waived off penalty on prepayment of such home loans.
This came after RBI early this week had issued a circular (DBOD. No. Dir. BC. 107 / 13.03.00/ 2011-12) titled ‘Home Loans – Levy of foreclosure charges/prepayment penalty’ prohibiting the prepayment charges on floating rate home loans.
A RTI was filed with RBI asking whether dual rate home loans at any stage of the loan tenure fall within the definition of home loans with floating rates. It further clarified that as per extant instructions in case of dual rate/special rate home loans, the provisions of this circular will be applicable from the date the rate of interest on the loan becomes floating.
RBI and NHB last year had already issued directives to bank and housing finance companies instructing them not to levy any penalty on prepayment of home loans in case of floating rates. Now they shall be forced to withdraw prepayment charges on both floating rate and dual rate home loans. However such penalty will continue on home loans taken on fixed rate. A home loan will classify as fixed rate loan if the loan remains fixed for the entire period.