In a relief to borrowers, the Reserve Bank of India (RBI) has asked banks to immediately stop charging penalty on pre-payment of home loans taken on floating interest rates. The RBI noted that the Damodaran Committee had observed that foreclosure charges levied by banks on pre-payment of home loans were resented by home loan borrowers. This is particularly so considering that banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario.

“As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available sources,” the RBI said. It expects removal of the charges or penalty to lead to reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of floating rate home loans. Some banks were charging pre-payment penalty of 1%-2% of the outstanding loans.

Earlier, housing finance regulator, National Housing Bank (NHB), had directed all housing finance companies to desist from imposing a pre-payment penalty. NHB, which regulates 54 housing finance companies, including mortgage major HDFC, LIC Housing Finance and DewanHousing Finance, had said that if the borrowers want to pre-close a housing loan out of their own sources, then there should not be any penalty.