The Reserve Bank of India is the central banking infrastructure in the country. It controls and monitors the supply of the Indian currency, apart from acting as the parent organization for all the financial institutions operating on Indian soil. Until 2016, it was also responsible for monitoring the country’s monetary policy.
Quick Facts About RBI
- Established – April 1, 1935.
- Presided by – The Governor of RBI.
- Current reserve – Rs. 2,837,400 Crore.
- Current repo rate – 5.4% (August 2019.)
The RBI also sets the regulations regarding loans and other debt instruments. It extends to the prepayment of a home loan as well.
RBI Guidelines for Prepayment of Home Loan
Financial institutions are bound by RBI regulations when it comes to the prepayment of a home loan. The basic premise is that a borrower can prepay anything above their EMI amount and bring down their debt burden or foreclose it all together, against a fee charged by the lender. This part-prepayment fee typically hovered around 2-5% of a loan amount.
However, the RBI stepped in and issued a circular detailing what financial institutions can and cannot do. Here’s a brief analysis of the RBI guidelines for home loan prepayment.
- Financial organizations cannot charge a prepayment or foreclosure fee if the loan in question is availed with a floating interest rate.
- Housing finance companies (HFCs) are not entitled to part-prepayment or foreclosure fees even on loans with a fixed interest rate, provided that the borrower is making this prepayment with his own finances and not with the help of another loan.
- For non-individuals, such as companies or trusts, part prepayment, and foreclosure charges are always applicable regardless of whether they have availed their loan with a fixed or floating rate of interest.
- For home loans with dual interest rate features, part-prepayment charges are applicable subject to certain criteria. It is levied if the interest is still charged at a fixed rate. If the home loan repayment schedule has entered a floating rate of interest phase, no prepayment charges are applicable.
What Is Prepayment?
When an individual borrows money from any financial institution in the form of loans, the onus of repayment is on them from subsequent months. They have to pay a certain EMI amount every month for the duration of their tenure towards their home loan repayment.
Now, every borrower, regardless of their financial situation, wants to clear their debt as soon as possible. To aid them in doing so, financial organizations offer prepayment options so that borrowers can repay more than their pre-set EMI amount, and bring down their debt burden.
Prepayment can be broadly subdivided into two components –
- Part-prepayment
- Foreclosure
Part-prepayment happens when a borrower repays a certain percentage of the principal amount over and above their EMI. Foreclosure refers to clearing the entire outstanding amount at one go and closing that loan account. Borrowers should keep certain factors in mind when prepaying their home loans.
Why Is Prepayment Fees Charged by Lenders?
It may seem counterintuitive to have to pay a fee when you are prepaying your loan, but there’s a reason why lenders charge these fees. Home loans are typically high-value and long-term. When a lender disburses a loan, it is designed in such a way so as to incur interest for the entire loan tenure. When a borrower chooses to part-prepay or foreclose the loan, the lender may potentially disrupt a lot in interest amount receivable. To protect themselves from such losses, lenders charge a fee. It is also done to discourage borrowers from transferring their outstanding loan amount to a different lender.
However, there are certain lenders which charge no to minimal part prepayment and foreclosure fees on their home loans.
Along with this benefit, they also offer pre-approved offers, which ease the loan application process for a borrower. Such pre-approved offers are applicable to home loans, business loans, and personal loans, among a host of financial products. You can check their offers by submitting a few essential details.
The RBI and NHB (National Housing Board) have set these regulations for the prepayment of a home loan to safeguard the interest of borrowers. Read them carefully and in detail before you choose to prepay your loan.