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TWO leading banks -State Bank of India (SBI) and ICICI Bank -have waived the pre-payment penalty on home loans.
While SBI has waived off pre-payment penalty for new and old customers, fixed rate loans or floating rate loans, whether the prepayment is paid from your own source or from a borrowed source, ICICI Bank, on the other hand, has waived pre-payment penalty for floating rate loans.
If your bank has not announced removal of prepayment penalty, don't worry, because it is just a matter of time before banks do so. Regulatory pressure and market competition will force more banks to waive off pre-payment penalty on home loans.
During its monetary policy on October 25, Reserve Bank of India (RBI) governor D Subbarao told Financial Chronicle, Should banks not move in the right direction (by waiving prepayment penalty), then we will do something assertive rather than cajoling them.
There is proposal to waive it in a floating rate regime, because, if the borrower had borrowed on a floating rate and if rates went down afterwards, that borrower was not getting the benefit of decline in interest rates. The borrower also could not switch to another bank because of the deterrence of pre-payment penalty.
The regulator for housing finance companies, the National Housing Board (NHB), has already asked housing finance companies (HFC) to charge uniform interest rate to old and new borrowers and has also waived off the pre-payment penalty on floating rate loans if borrowers pre-pay through any source. For home loans that are on fixed interest rate, HFCs cannot charge a pre-payment penalty if the loan is pre-closed out of one's own sources.
At present, banks charge 2-4 per cent of the loan outstanding as pre-payment charges from home loan customers.
With the RBI increasing key policy rates by 350 basis points since March 2010, home loans rates on an average have risen by 250300 basis points (3 per cent) for floating rate customers. Banks, however, reduce interest rates for new customers.
Pre-paying your loan: If you have a home loan and if your bank announces the waiver of pre-payment penalty, try and make the most of this opportunity, because this is the best option to get out of your home loan fast. Saving on the net interest is the significant advantage of pre-paying a home loan, other than the fact that you will retain the complete ownership of the house earlier than planned.
The longer the tenure, the more the interest repaid, hence, it is best to repay your home loan in the shortest loan tenure possible provided your income allows you to do so.
Experts suggest that those who have surplus funds that are not giving good returns, they should use these funds to pre-pay their loans.
Consider your tax benefits also on your home loan before pre-paying: Under Section 80 C of the Income Tax Act, a borrower can get a tax deduction of Rs 1,00,000 every year for the repayment of principal.
He can also claim deduction of up to Rs 1,50,000 per annum under Section 24(b) for the interest paid on the home loan.
Do a cost-benefit analysis taking into account the tax deductions before prepaying.
If a person is in a higher tax bracket (30 per cent), his home loan rate of interest is 11 per cent and his outstanding principal is up to Rs 14,00,000, then his effective rate of interest works out to be 7.7 per cent. Such a person should not pre-pay. However, he should consider pre-paying the outstanding amount Rs 14,00,000 because he does not get tax benefit.
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