Pre-Payment Penalty on Housing Loans and Discriminatory Pricing between Old and New Customers

During the last week, two significant circulars were issued by the National Housing Bank, the apex regulator of Housing Finance Companies in India. The gist of the circulars are as follows:

1. Housing Finance Companies are not allowed to charge pre-payment penalty on closure of floating rate loans irrespective of the source of funds to close the housing loans.

2. Housing Finance Companies are not allowed to charge pre-payment penalty on closure of fixed rate loans, provided the loan is closed with own funds. That is, the customer is not borrowing from other Housing Finance Companies or banks or NBFCs to close his fixed rate housing loan.

3. Thirdly, the housing finance companies are not allowed to charge differential interest rates for old and new customers on their floating rate loans where the credit/risk profile.

Frequently Asked Questions:

When does these provisions take effect?

It is effective immediately. That is, from 19th October 2011.

What are these Housing Finance Companies?

Few examples of HFCs are HDFC Ltd., LIC Housing Finance Ltd., Dewan Housing Finance Ltd., Gruh Ltd., REPCO Housing Finance Ltd.,

Does this new rule apply to banks like SBI, AXIS, ICICI?

No, it applies only to HFCs. Banks are regulated by Reserve Bank of India.

Can we expect the same set of rules to be enforced for Banks in the near future?

Yes, RBI is working on a similar kind of rules for housing loans issued by Banks. Our guess is it should happen as soon as possible.

Does this new rule apply to part-payment of housing loans?

Though it is not specifically mentioned in the NHB circulars, it is very logical to assume the same set of rules for part-payment of housing loans. So, there won't be any penalty for part-payment of either fixed or floating rate loans out of own funds.


Who should make use of this new set of pre-closure rules?

Having high balance in Savings bank account but paying high interest on their housing loans fearing exorbitant pre-closure charges, should be first set of people who must take advantage of this new provision.

Whom should I contact if my HFC doesn't allow pre-closure of loans without penalty or if there is discriminatory pricing?

You should contact National Housing Bank.