National Housing Bank (NHB) has asked the housing finance companies (HFCs) not to levy penalty on pre-closure of floating rate home loans even if the pre-payment is made through funds borrowed from other banks and finance companies.
There are 54 HFCs in India which account for 33-35 per cent of the Rs 500,000 crore home loan market in the country.
In addition, the regulator has directed HFCs to ensure uniformity in charging floating rate of interest to old and new customers. This is aimed to put an end to the dual rate or teaser home loans which are offered by many mortgage financiers.
In a circular issued on Wednesday, NHB said HFCs cannot penalise customers for pre-closing floating rate home loans even if the funds are borrowed. But for fixed rate housing loans the pre-payment charge will be waived only if the loan is pre-closed by the borrower out of their "own sources".
According to NHB 85-90 per cent of home loans are currently on floating rate.
"All HFCs are advised to ensure compliance of the above with immediate effect," NHB said adding non-compliance will attract penal provisions.
HFCs have been charging penalty on pre-closure of floating rate loans if the funds used to pre-pay the loan are not from borrowers' own source.
For instance, the country's largest mortgage lender Housing Development Finance Corporation (HDFC) charges 2 per cent pre-payment penalty if a borrower pre-close the entire loan taken on floating rate out of borrowed funds.
For fixed rate loans HDFC charges 2 per cent pre-payment penalty even if the loans are repaid through borrowers own source. HDFC has nearly a third of the home loan market share. The latest circular from NHB comes a month after the Reserve Bank of India (RBI) said banks must not recover pre-payment charges in floating rate loans and charge pre-payment penalties in case of fixed rate loans only.
Most bankers have so far said that RBI has only suggested and not mandated waiver of penalty for pre-closure of floating rate loans.
"There should be a level playing field. While HFCs are now forced to waive the pre-payment penalty even though banks are not," said an official of a housing finance company requesting anonymity.
In addition, NHB in its circular said with immediate effect "HFCs are advised to apply uniform rates of interest to the old and new borrowers, who have the same credit or risk profile."
The regulator said the practice of charging old customers higher rates than the new customers is discriminatory and lacks transparency and fairness.
