prepayment of home loan easier

The government is planning to seek changes in the prepayment rules to enable a home loan borrower to shift to cheaper lenders if his bank raises interest rates soon after disbursing the loan.

The Competition Commission of India (CCI) has sought replies from all banks after receiving suggestions from loan borrowers, asking why prepayment penalty should not be held as anti-competitive practice.

One can always prepay a home loan, his finances permitting. The timing of prepayment needs to be chosen carefully. The borrower needs to check how much of the loan can be prepaid without attracting penalties. Most banks allow a borrower to prepay up to a certain point without any penalty. One would need to ensure the part-prepayments do not exceed this limit to avoid a prepayment penalty.

Prepayment charges differ across banks. Usually, the prepayment charge levied is two percent of the principal outstanding at the time of foreclosure and amount paid in excess of the monthly instalment in the last one year. In some cases, no charges are levied if the prepayment is made after three years of availing the loan and if it is from own savings.

The penalty clause is usually incorporated prominently in the contract. The charges go against those wanting to pay off a loan or move to one offering better terms. Most banks waive the penalty if the repayment is made with the borrower's own money. But they charge it if the borrower takes a loan from another bank to prepay the existing one. It acts as a deterrent to borrowers who wish to switch the lender by way of refinancing the loan when the other bank offers a lower rate of interest.

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