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THERE is now an open and all out war in the housing loan market with respect to the prepayment penalty on home loans, and borrowers must now be feeling happy with the manner in which things are moving. Initially, it was the National Housing Bank (NHB) that started the process by asking housing finance institutions to abolish the prepayment penalty on floating rate loans, but in recent times, even the banks have jumped on to the bandwagon. This has ensured a possibility of gaining from the situation for many people.
Banks: The banks have now started to eliminate the prepayment penalty and the two largest banks in the country have made announcements to this effect.
This is good news for the borrowers who have taken housing loans and they would want to repay the loans earlier to gain from the situation. All that they have to ensure is that they meet the conditions set for this purpose. However, there are a few small details that can halt the process, so, these must be given due attention.
Only floating rate loans: One of the things that the borrower has to check is whether the benefit of the non-payment of the prepayment charge is present for all types of loans. This might not be the case, as there could be some sort of restriction that is present on the type of loan that will actually qualify for the benefit.
Some banks and institutions actually restrict the benefit only to floating rate loans, which means that the fixed rate loans remain outside of the benefit.
The real benefit will be for all borrowers with floating rate loans and who are actually taking a hit as far as the interest rates are concerned.
Time period: The borrower also has to see whether the no prepayment charge benefit is restricted for a specific time period. If this is the case, then there would be some obstacles for several people while they go about getting the benefit of the situation. If there is no time restriction, then the borrower can plan future action, but this is one aspect that must be kept in mind as the institutions might impose a time restriction sometime in the future.
Effective savings: This is a move that can result in significant savings, as far the individual borrower is concerned. The prepayment of your home loan gives you an option to shift to a loan provider, which offers a lower rate of interest. If the borrower is paying a higher rate of interest that has climbed significantly, then, there is a need to undertake some homework on this front.
Looking for interest rates that are lower and that borrower would qualify for would be important as the starting point for the entire exercise. The next step would be deciding as to whether they would be using only financing from outside sources or whether they would also be using their own funds.
After this, an eye has to be kept on the savings that the transaction actually generates, because, this is a vital part, as there has to be some overall savings in the effort and in many cases the benefits might be visible over a longer time period.
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