Good news for those stuck in teaser or dual interest home loans

If you had bought your home on a teaser loan or a dual interest rate loan, you have reasons to cheer. The National Housing Bank (NHB), which regulates housing finance companies (HFCs), has said no penalties will be applicable on pre-payment on pre-closure of such housing loans.

Dual interest loans are loans which have a lower fixed rate of interest for initial few years, and once the fixed period is over, the loan shifts to the prevailing floating rate.

“Such loans were popular around 2008-09, which means a larger number of borrowers would now be in a place where their loans would move to the floating rate period of the loan,” says, Siddharth Gupta, co-founder, Gnbindia.com, a group home loan buying portal.

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[caption id=“attachment_413729” align=“alignleft” width=“380”]  : You need not pay any pre-payment charge at all for the pre-closure of the loan.[/caption]

The typical issue with such loans is that during the initial few years, the equated monthly instalments (EMIs) were lower, but once the loan moved to the floating rate period, the EMI’s rocketed. And, borrowers had to continue with the same lender, due to the pre-payment charges clause.

What the NHB circular says and why: As per the NHB circular, if you are on a dual rate loan, the rules regarding prepayment charge, which are applicable for regular fixed loans, will apply as long as your loan is under the fixed rate regime. The pre-payment rules as per folating rate loans will kick in once your loan comes under the floating rate regime.

Many NBFCs were penalising dual rate borrowers even if they were in the floating rate period. “This stopped many borrowers from shifting their rates to lenders, which offered lower rates, and hence a better deal,” Gupta said.

In fact, even the NHB in its circular said there was lack of uniformity across industry for dual rate loans. Most HFCs charged a pre-payment penalty between 2% and 4%.

“All our semi-fixed floating rate loans have now moved on to the floating rate period since March 2012. And we would respect the NHB circular on pre-payment charges,” a spokesperson of HDFC Ltd, the country’s largest mortgage lender, told Firstpost.

But there are many lenders who had offered a fixed rate period of as much as five years.

What it means for you

In the floating rate period: You need not pay any pre-payment charge at all for the pre-closure of the loan. This stands true, irrespective of the source of your funds. So, you can switch your loan to another lender without being worried about any pre-payment penalty.

In the fixed rate period: You need not pay a penalty if you pre-pay the loan with your own source of funds. However, the penalty will become applicable if you shift the loan to another lender. Beware that purely fixed rate loans, which are on a fixed rate for the entire tenure, will still continue to have a pre-payment penalty if you plan to pay-off the loan using borrowings from another lender.

What should you do now: If you are already in the floating rate period of your teaser loan, you may want to negotiate with your own lender for a better rate. Says, Gupta, “Lender would like to retain their borrowers. So if you are already in the floating rate period of the dual rate loan, approach the lender for a better rate. Or, you could think of switching the loan to another lender. After all, there are other lenders such as State Bank of India which offer an attractive rate of 10.50 percent now.”

If you are in the fixed rate period of the dual rate, it would be better do a calculation to see if the switching would make any sense. “Keep in mind the pre-payment charges of the current loan and the processing fee of the new lender when you think of switching the loan,” Jayant Pai, certified financial planner and vice-president, Parag Parekh Financial Advisory Services Ltd.

Certainly this is good news for those stuck in the teaser loan provided you do the math and take a calculated decision.