Now, switch lenders for free

Changing your lender for a better rate has just got easy. The Reserve Bank of India, in Tuesday’s annual monetary policy review, has asked banks not to levy any pre-payment penalty on foreclosure of home loans — a move implemented by the National Housing Bank around three months before.

The move, in effect, means the removal of an arbitrage opportunity that had been created by borrowing from housing finance companies (HFCs) vis-a-vis banks. For almost three months, HFCs looked like a better option because of no exit load for foreclosing. Bankers feared home loan borrowers would prefer HFCs over banks.

While State Bank of India had also removed the pre-payment penalty, many other banks continued to charge it. Many others like Axis Bank and IDBI Bank have done away with foreclosure penalties voluntarily.

Banks used foreclosure charges or prepayment penalty as a deterrent for borrowers looking to prepay, refinance or transfer the balance as well. The onus was on the borrower to prove they were making the prepayment from own funds, and not through a loan from another financer.

This will aid smooth transfer between lenders. In addition, the differential rate between new and old borrowers will reduce substantially because the lender will face the threat of losing customers if the old borrower is charged much higher.

At present, banks charge between two per cent and 2.5 per cent as foreclosure fee. For instance, says HDFC Bank’s website, it does not allow prepaying the loan in the first six months of the term. Between six months and five years, the bank charges 1.5 per cent of the original loan amount and 0.75 per cent between five and ten years. After completing 10 loans years, you can prepay free of cost.