Borrowers from housing finance companies such as HDFC, LIC Housing Finance and Dewan Housing may not have to pay pre-payment charges if they make the payments out of their own source of funds.
National Housing Bank, regulator for the housing finance companies, has issued guidelines on this to HFCs, an NHB official said.
Housing finance companies (HFCs) and banks have been charging up to two per cent (depending on the time of pre-payment) of the loan amount as pre-payment penalty. Borrowers from these companies can now pay back their loans before completion of their tenure without paying penal charges. However, they will have to make the payment from their own savings or other own source of funds but not out of borrowing from banks or other finance companies, the official said.
Mr R.V. Verma, Chairman and Managing Director, NHB, confirmed that the bank has issued the guidelines to all housing finance companies last week.
The pre-payment charges are levied to discourage borrowers from switching a high-cost loan from one company to a low-cost one from another, said an official with a housing finance company.
Mr R.R. Nair, Chief Executive and Director of LIC Housing Finance, said the company has received a communication from NHB asking it not to charge loan prepayment charges if the payment is made out of customer's own source of funds.
“We have already given instructions to our offices subject to verification of the source of the funds”, Mr Nair said.
Customers will have to fill-up a form of declaration which has to be supported by documentary evidence about the source of funding, he added.
Mr Anil Sachidanand, Chief Executive Officer, Dewan Housing Finance, said “It is a customer friendly move. It will ensure more transparency”. However, customers should ensure that they are not borrowing from another institution to pre-pay the loan. “If they make prepayments from a borrowed fund, we will levy repayment charges upto 2 per cent”, said Mr Sachidanand.
There have been an increasing number of cases where borrowers swap a high–cost loan with a low-cost one. There is nothing wrong with it, but they have to pay a charge for it. This is because HFCs price their loans on the basis of their cost of funds. Normally they borrow long–term. If they allow free-of-charge pre-payment in the first or second year of the loan, that will impact their margins, said an analyst.
“When we give a long tenor loan, we borrow from the market on a long-term basis. When customers prepay the loan, it causes asset liability mismatches,” said Mr Nair.
Stringent checks
With this waiver of charge on pre-payments, there will be more stringent checks when customers ask for full closure of the loan. “When customers make a full repayment and seek closure, there is a bigger chance of the customer going to another bank or HFC for a loan,” said Mr Nair.
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