Banking regulator, Reserve Bank of India has notified the banks across the country to stop levying penalties on pre-payment of their floating rate home loans. This will bring cheer to many home loan borrowers who can now manage their loans better.
This would be advantageous to existing borrowers who can now switch their loans from one bank to other offering better rates. Many banks have already stopped levying pre-payment fines, but RBI said uniformity was needed to make the market more competitive and result in finer pricing of floating rate home loans.
Floating rates home loans form the largest category of home loans; nearly 90% of all home loans are floating rate. Banks tried to convince RBI the implications on asset liabilities management (ALM), but RBI stayed with its decision.
Currently banks charge 1-2% of the balance amount as a penalty on foreclosure of floating rates home loans. These directives come from the recommendation of the Damodaran Committee.