Prepayment Charges abolished by RBI

This is a little old news. RBI has finally abolished Prepayment charges or penalty on home loans with floating interest rates. Borrowers can now transfer to new lender which provides them less interest rates without paying any kind of charges or penalty. Damodaran Committee on customer service in banks, RBI) has been observed that banks have been unfair in asking for charges when home loan borrowers want to switch to some other lender with lesser interest rates. Now if you prepay the loan from your own sources or through another lender, you only pay the outstanding loan amount.

Here are the excerpts from the circuler from RBI on abolistion of fore-closure charges/pre-payment penalty

2. In this context, attention is invited to paragraphs 81 to 83 of the Monetary Policy Statement 2012-13 announced on April 17, 2012 with regard to home loans on floating interest rates. The Committee on Customer Service in Banks (Chairman: M. Damodaran) had observed that foreclosure charges levied by banks on prepayment of home loans are resented upon by home loan borrowers across the board especially since 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 source.

3. The removal of foreclosure charges/prepayment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of the floating rate home loans. Though many banks have in the recent past voluntarily abolished pre-payment penalties on floating rate home loans, there is a need to ensure uniformity across the banking system. It has, therefore, been decided that banks will not be permitted to charge foreclosure charges/pre-payment penalties on home loans on floating interest rate basis, with immediate effect.

Prepayment Charges removal will help !

This new rule will surely be taken in good spirit by borrowers and end the discrimination done by banks between old and new customers. This will also make sure that the interest rates become more competitive in the overall system.

Have you prepaid your home loan just some time back with charges ? Are you going to prepay the loan soon after this Prepayment Charges removal ? What are your thoughts about this new circular !

238 CommentsAdd Comment

  1. i took plot loan 3 years back with 12.25% interest, now i got a message that it will be increased to 13.75% because of construction not been completed, they told its new interest rate guided by rbi, is it true

  2. chandrashekar


    as per RBI pre closure charges to be waived off,but if still banks are charging then how we can complaint against the banks.

  3. Vijay

    Hello Manish, Nice Article.
    Does this also applies to Plot Loan? Is there any difference in the way bank lists Home loan vs Plot loan. I have a Plot loan from DHFL and planning to close this by using a Top UP loan from my other Housing Loan.
    This is what I see on DHFL Website( I have not constructed any house on that)

    Prepayment Charges
    (Plot loans / Easy Land-cum Construction Loans) 3% in case the dwelling unit is not constructed on the plot within 3 years from the date of first disbursement of the loan.

  4. ANIL

    I have a personal loan going on in my name for more than 2 years now, I want to close that account but as per agreement, there is a prepayment charge of 4 %. I just want to understand that post may,2014 notification of RBI regarding this, whether bank can still charge these charges – kindly advise

  5. Muralidharan

    Dear Mr.Manish’

    I have taken a personal loan from HDFC bank , want to foreclose the loan amount and they are charging 3%. which is very high
    Is there any chance to get a waive off or transfer in a better scheme



  6. Surender Arora

    I want to know that if I have taken up a LAP in my company name and wants to make some extra payments in my loan, still an NBFC will put some charges which is 4% of the remaining loan amount on the additional payment i make in my account. Please advice.

  7. Capt. Gupta

    I’ve taken a loan against property of a certain amount from Indiabulls (IFHL) and they are charging a pre-payment penalty of 5.62% which I feel is totally unjustified as I’m getting at a lower interest rate from other sources. They took signatures on blank loan documents. Later on, they filled up various columns which were not acceptable to us. Instead of individual borrowers, they made myself,my wife and my company (pvt. ltd.) as borrowers.
    I want to know are they legally justified in charging such foreclosure at the rate of 5.62%.
    We have lodged a protest and would like to know what legal remedies we have against this kind of extortion by Indiabulls.
    Do consumers like us have any protection against this?
    Kindly let me know.

  8. Som kumar K P

    I had taken a loan of Rs 40 Lakhs from Dhanlaxmi Bank ltd. to construct a commercial building with a repayment tenure of 95 months. Now, after 44 installments I wish to close the loan. Will there be any foreclosure charges applicable on this? Kindly let me know.

  9. shanker

    hello sir,,
    i have taken home loan on sbh ..i have paid yesterday as a prepayment of sbh home loan (loan amount 9lks) sbh manager is asking prepayment penelty 2% (17080 Rs)
    please advise me sir…i am waiting for your replay..why should i pay penelty..Is it is legal .

  10. vinaypal

    Hello Manish Ji
    I have taken a personal loan of 1 lac rs. from fullerton india credit co. (a nbfc) in 2014 for 3 yrs. At the time of taking loan they told me rate of interest is 18% as flat rate of interest. They did not give me sanction letter, loan repayment schedule and loan agreement. Now i want to foreclose this loan. when i talked about the executives for closing the loan they gave me loan repayment schedule and account statement. In the loan repayment schedule the interest rate is 32% per annum and they are charging 7% foreclosure charge on remaining principal amount with 12.36% service tax. Could u help me sir about this. Is this right or wrong. If i want to make complaint about this where i can do so ?

    • Hi vinaypal

      The mistake you did is not checking these details in the start . How can you not take the documents from them which has all terms and conditions ! . If you have signed the documents, I think they can charge it !

  11. bhavesh bhatt

    dear sir,

    i have a car loan with fix intrest rate with HDFC bank. i had already paid 12 emi to bank. at present pending loan amount is Rs. 205000/ i wants to pay Rs. 50000/ as pre payment. HDFC people told me they charge penalty @5.25% + servicetax on the prepayment amount (rs.50000/-) . is this legally right ? i read somewhere,RBI had give guideline for not charge any penalty for prepayment.

    pls guide me & reply.

  12. sanjay

    i want to transfer my home loan from icici bank to sbi but icici bank has charge foreclouser charges to me but forecloser charges is abolishe by rbi please guide me

  13. Hi
    My name is Manu Kammar, I have taken takeover car loan from HDFC bank, which is fixed rate interest of 16.75 %. Before getting loan I got call from HDFC sale executive saying that interest rate is 11% and that is floating rate interest but when loan got released interest rate raised 16.75% and fixed interest. I enquired to bank customer they did not help me because I do not have any proof, when bank sales executive approached me to take sign for loan documents I asked him its everything blank and bank sales executive told me that you sign here we will fill up everything by given data from my Id proofs. Even though bank has deducted pre closing loan but RBI has removed for pre penalty and moreover my car loan is not per closing its a takeover loan, Which I am continuing the loan earlier which existed another name. Bank officer is not approving my concern, could you help me regarding my worries.
    Here My concerned is they deducted high rate interest for pre closing penalty which is takeover loan.

  14. peri joga rao

    I have taken a home loan from a nationalised bank (United Bank of India), with floating interest rate in Feb.2013. Now I have pre -closed the loan by a takeover from ICICI.But the nationalised Bank is claiming 2% preclosure charges from me now since the loan was paid by ICICI ie., BANK TAKEOVER AND NOT FROM MY OWN SOURCES. kindly let me know what is RBI Guidlines on this ?Also in my Loan offer letter from nationalised Bank (in feb 2013)they have mentioned that i have to pay 2% on outstanding loan Amount in case of other banks taker over.Pl.let me know i have to pay this or not (Based on RBI Directive)
    Peri Joga Rao

Leave a Comment