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Banking industry

Home Loan Interest Rates Rise, Prepayment Charges Become a Reality

Strategic Insights

— 1 min read

As the Reserve Bank of India (RBI) increased the repo rate by 50 basis points (bps) to 5.90% in September 2022, several banks and non-banking housing finance companies have mirrored this hike by increasing their home loan rates. This upward trajectory in interest rates has led to a surge in prepayment charges, which can range from 2-4% of the unpaid principal amount at the time of prepayment. Home loan prepayments consist of two parts: the principal amount and the interest paid on the loan amount, both of which are tax deductible under Sections 80C and 24(b) of the Income Tax Act of 1961.

Key Takeaways:

  • Home loan repayment consists of two parts: principal amount and interest paid on the loan amount, both of which are tax deductible under Sections 80C and 24(b) of the Income Tax Act of 1961.
  • Prepayment penalties are fees charged by banks for paying off a home loan early, typically ranging from 2-4% of the unpaid principal amount.
  • Pre-EMI interest is payable every month from the date of each disbursement up to the date of commencement of EMI (Equated Monthly Installment) on the portion of the loan disbursed.
  • Many banks allow prepayment of a home loan, but charge early repayment penalties up to 2-3% of the principal amount outstanding.
  • Prepayment penalties may vary depending on the source of funds, with charges being higher when using a loan from another bank for prepayment.
  • Some banks do not charge prepayment penalties when depositing more than the EMI amount into the loan account on a periodic basis.

Statistics:

  • RBI increased the repo rate by 50 basis points (bps) to 5.90% in September 2022.
  • Home loan rates increased by almost the same proportion by several banks, including ICICI Bank and Axis Bank, as well as non-banking housing finance companies, such as HDFC Ltd and LIC Housing Finance.
  • Prepayment penalties range from 2-4% of the unpaid principal amount at the time of prepayment, according to IDFC First Bank.
  • Pre-EMI interest is payable every month on the portion of the loan disbursed, according to RBI FAQ.

Sources:

  • Reserve Bank of India (RBI) - "Reproductive rate increase to 5.90%" - September 2022
  • IDFC First Bank - "Prepayment Penalties" - (no date provided)
  • RBI FAQ on housing loan - (no date provided)

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