Home loan interest rates have increased from around 6.5% to 8.5% in the last two years. As a result, most banks and NBFCs have increased the home loan tenor for existing borrowers. The borrower did not get an option to choose whether their home loan EMI or tenure should be increased. The RBI has noted this and introduced some measures to protect the interests of home loan borrowers. Let us understand these.
At the time of interest rate change, the borrower to choose whether to increase EMI or loan tenor: Earlier, whenever the interest rates on home loans went up, banks increased the loan tenor. In many cases, it led to unreasonable tenor elongation of floating rate home loans. Banks did it without proper consent and communication with the borrowers.
To address this issue borrowers face, the RBI has put in place a proper conduct framework that banks must follow. The framework will require the bank to inform the borrower at the time of resetting the home loan tenor and/or EMI. The borrower will have the choice of opting for either increasing the EMI, extending the loan tenor, or a combination of both.
The borrower will also have the option to either make a partial or full prepayment of the loan. The bank will have to communicate the prepayment or foreclosure charges to the borrower.
Borrowers can switch from a floating rate to a fixed rate home loan: Banks will have to give borrowers the option to switch from a floating rate to a fixed rate home loan. The bank will have to disclose all charges, including service or administrative charges, for switching.
Banks have to provide quarterly statements to borrowers: Banks will have to share a quarterly statement with the borrower. The statement should have details like the principal and interest paid to date, the remaining EMIs and the amount, the rate of interest, etc.
Property documents have to be returned within 30 days after loan repayment: On 13 September 2023, the RBI issued guidelines on responsible lending conduct. Under these guidelines, the bank has to release all the original movable or immovable property documents within 30 days after full repayment or settlement of the loan account.
The bank has to give the borrower the option to collect the property documents from the branch where the loan was serviced or any other bank branch/office where the documents are available. The loan sanction letter should mention the timeline and place of return of documents.
If the bank doesn't return the documents within 30 days of loan repayment, it has to communicate the reason for the delay to the borrower. If the delay is on the part of the bank, it has to compensate the borrower at the rate of Rs. 5,000 for each day of delay.
If the property documents are lost or damaged, wholly or partly, the bank must assist the borrower in obtaining duplicate/certified documents. The bank has to bear the costs of obtaining the duplicate/certified copy of the property documents.
The above guidelines apply to all cases where the release of property documents falls due on or after 1st December 2023.
RBI measures to foster transparency and empower borrowers: All the above RBI measures will foster transparency. Banks will have to communicate with borrowers and make them aware of the impact of interest rate changes. Borrowers can choose whether they want to increase the EMI, loan tenor, or both. They will also have the option to switch from a floating rate loan to a fixed rate loan, prepay the loan partially, or foreclose it. Thus, the RBI measures will empower borrowers to have a say in their home loans rather than banks deciding to increase the loan tenor when interest rates rise.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.