Many banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. So, the RBI has asked banks to now do away with foreclosure charges.
RBI circular states that the removal of foreclosure charges/prepayment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of the floating rate home loans.
Though many banks have in the recent past voluntarily abolished pre-payment penalties on floating rate home loans, there is a need to ensure uniformity across the banking system.
Therefore, RBI has decided that banks will not be permitted to charge foreclosure charges/pre-payment penalties on home loans on floating interest rate basis, with immediate effect.
Usually the pre-payment charges are between 1-3% depending on the bank. Its a sigh of relief for many customers who are planing to switch to other banks.