Teaser home loans can be freely pre-paid during floating rate phase

Borrowers who availed of dual rate home loans, which were hugely popular between 2009 and 2011, will be allowed to pre-pay loans during the floating rate phase without a penalty.

The National Housing Bank has revised its earlier decision where it had said that dual rate loans would be classified as fixed rate loans if at the time of signing the contract the loan was subject to a fixed rate.

Since a big chunk of home loans that were availed during 2009-2011 were dual rate, a big chunk of borrowers will benefit as these loans are now switching to floating rate.

These borrowers who raised loans at interest rates ranging from 8% to 8.5% found their interest burden jumping to over 11.5% as the rates switched to floating. This was because interest rates had moved up sharply between 2010 and 2011 when Reserve Bank of India raised its key rates 13 times.

Although NHB and RBI have asked lenders to waive penalties on refinancing of floating rate loans the one exception was floating rate loans which were earlier fixed as they were part of a dual rate contract wiith housing finance companies.

NHB in October 2011 had said that in the case of dual rate loans, lenders should consider the loan as fixed if the loan had a fixed loan nature at the time of the contract. As a result of this HFCs were requiring borrowers to pay a foreclosure penalty of 2% on dual rate loans even when they were repaid after the switchover to floating rates.

""Feedback was received by NHB about the features of the dual/special rate products offered by the HFCs and their relative interest rate structures. It has been observed that there is wide variation/ non-uniformity in the features of the product offered to the customers by the HDFC.

The lack of uniformity has been observed across the industry as also by the same lending instutitons at diferent times, including the relative periods of fixed v/s floating rates in the dual rate loans. It is also observed that this wide variation in the product features reflects lack of uniformity and transparency, not considered healthy for the system"" NHB said in a circular issued on Tuesday.

The circular added that in light of information gathered from housing finance companies NHB has decided that instead of the time of loan agreement being the determining factor, the nature of the loan at the time of pre-payment would be reckoned to determine whether pre-payment charges will be applicable.

""This applies to all such dual/special rate housing loans being foreclosed hereafter. Further, it is also clarified that a fixed rate loan is one where the rate is fixed for the entire duration of the loan"" NHB said.