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Loan prepayment provisions and charges

Check prepayment provisions and charges carefully
Being able to prepay a loan is a happy feeling. Here are some quick tips to help you get there.
Check what the bank will charge for allowing you to prepay the loan, either fully or partially. This can range from nil to a few percentage points. There may also be timing restrictions.

A floating rate home loan is exempt from prepayment charges as per RBI and NHB guidelines. This is irrespective of whether you prepay partially or fully and whether you prepay out of own funds or by refinancing or balance transfer.

A fixed rate home loan typically carry 1-2.5% prepayment penalty. However, most lenders allow you to prepay upto a certain portion of your loan (between 25% and 90%) in a year without any charges.
A floating rate loan against property (LAP) availed from banks and NBFC’s by individual borrowers is exempt from prepayment charges. However, fixed rate loans, or those availed by corporate entities or those availed from Housing Finance Companies typically carry prepayment penalty and this varies widely from lender to lender.

Prepayment charges, if applicable, may also depend upon source of funds to prepay, time elapsed since start of loan.

Prepayment charges are not a very large source of income for lenders. However, they prevent a borrower from refinancing the loan at cheaper rates (due to cost of switching). So, check these carefully while taking a loan so that you have no surprises when you want to prepay the loan.

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