Home loan pains: prepayment should be from your own money !
Below information is true as of 2011. Please check for revised rule. RBI was pushing to relax prepayment rules.
If you have recently taken a home loan, you may not be eligible for prepayment. Most lenders have a time frame, usually six months after taking the loan, within which you cannot prepay.IDBI Banklevies a 2-3% charge on prepayment of loans if it's done within six months.
If you are not faced with this restriction, check whether the penalty is applicable for complete or partial prepayment. HSBC does not levy a penalty if you prepay up to 25% of the sanctioned loan amount, but will be charged 3% if you cross this limit. In the case of HDFC, the 25% limit is calculated on the opening balance (that is, the remaining loan) in a financial year. Some lenders, such as Axis Bank, do not levy any prepayment charge.
Some banks do not levy a penalty on partial prepayments, but this will depend on when you foreclose the loan. If the loan is partially paid within one year of it being completely prepaid, you may have to pay a penalty on the earlier amount. So, if you prepay Rs 2 lakh on 2 May 2011 and close the loan in October 2011, you will have to pay penalty on Rs 2 lakh. In the case ofICICI BankandKotak Mahindra Bank, a 2% charge is applicable on the outstanding loan as well as the amount prepaid during the previous year, whileHDFCcharges this on the amount prepaid during the same financial year when the loan is foreclosed.
Source of funds
Both the RBI and NHB have been persuading lenders not to levy a prepayment penalty. Most of them have agreed that borrowers will not be charged if they prepay from their own funds, as opposed to using borrowed money. However, this facility is very stringent and lenders are fussy about defining 'own funds.' So, loans taken from other banks, employers, against an asset, or even help taken from a relative or children who are not co-borrowers, are considered 'outside funds'.
Bhopal-based Sukumar Chatterjee, discovered this when the interest rates shot up and he borrowed money from his son to pay `5.78 lakh of his outstanding loan. The 62-year-old was asked by the bank to pay a penalty as the funds were not his own. For proof, the bank referred to his account, which did not have the money for the previous six months. If Chatterjee had received a retirement bonus, sold his stocks or redeemed his investment, the money would have been considered as his funds and he would have been able to avoid the charges.
Banks ask for proof to substantiate the source of funds. "The borrower has to prove the availability of funds when he prepays the loan. Usually, they ask for bank account statement for the previous six months to verify the source of funds," says an HDFC spokesperson. Even if you cancel the booking and the builder returns your money, you will have to pay the penalty when you return the loan to the bank.
However, some nationalised banks offer a little more leeway. "If the builder has cancelled the project, there is no charge. The customer can't be penalised in such a case," says Bansal. Also, most public sector banks are not fussy about the funds. Some non-PSU banks do not make any such distinction and levy the charges irrespective of the source of funds. "HSBC doesn't distinguish between the source of funds while accepting prepayment requests. Standard prepayment charges are applicable," says an HSBC official.
"If the loan is being paid by another institution or bank, you are considered to have 'not paid using own funds'," says Bansal. Banks are unforgiving if you prepay by taking a loan from another bank. "As a norm, many PSU banks don't levy prepayment charges. However, there is no waiver if you refinance it," adds Govindan.
Axis Bankis one of the few lenders that does not levy a charge if a customer shifts his loan to another bank to take advantage of a lower interest rate. "The facility of zero prepayment charge on home loans on floating rate offered by Axis Bank is unconditional," says Jairam Sridharan, senior vice-president (consumer lending & payments), Axis Bank.
Experts suggest that if you have had a long relationship with a bank and a good payment track record, you could negotiate with the bank. You may be lucky and save on steep charges until the RBI makes it binding on banks not to levy a prepayment penalty under any circumstance.