RBI guidelines for Home Loan

Updated on December 18, 20184 mins read
RBI Guidelines for Home Loan

Updated: January, 2018 RBI is the Central Bank of the country and frames the policies for lending and deposits in India apart from carrying out other important functions. Thus all policies related to loans are also laid down by the RBI and the banks have to function within the framework set by the RBI guidelines. These guidelines cover various aspects of lending and borrowing and are amended from time to time keeping in view various macro and micro economic parameters. Here we focus on few guidelines that define the home loan segment. RBI Guidelines for Home Loan: From a borrower’s perspective taking a loan involves meeting the eligibility criteria, submitting the required documents and then adhering to the repayment rules as laid down by the lender in the loan agreement. Guidelines Related to Prepayment Charges:

    • As we know home loans come with a huge interest cost as they are usually big ticket and are taken for durations ranging from 10 to 25 years. This cost can be reduced if the borrower is able to prepay a loan fully or partially thus reducing the principal amount or the tenure. Prior to the RBI’s changed guidelines banks and NBFCs charged a fee ranging from 2% to 5% of the unpaid principal amount as prepayment charges if the borrower chose to make a partial/full prepayment. Now as per the RBI guidelines lenders are not allowed to charge anything for a prepayment on floating interest loans. This decision impacts home loan balance transfer process too.
    • Home loan balance transfer is an option that allows you to switch from an expensive loan that you availed some years back to a lower interest loan. At Switchme.in we have helped many customers save huge amounts by helping them switch to less expensive loans. You can read about the home loan balance transfer process in detail on our blog on the same topic.   The balance transfer option essentially involves foreclosing the existing loan and taking a new loan for the unpaid principal amount. With the charges on foreclosure of floating rate loans waived borrowers can switch to a new loan without having to bear the burden of these charges.  However, banks may charge pre-payment penalty on fixed rate loans varying from 1% to 3%.

Guidelines Related to LTV Ratio: There was a change announced by RBI in October 2015 that impacts the amount of loan available to the borrower. The RBI, as per the changed policy, allows a borrower to avail a loan up to 90% of the property value if the value of the property in question is less than or equal to Rs. 30 lakhs. For loans that are above Rs. 30 lakhs and up to Rs. 75 lakhs LTV Ratio is 80%. Loans above Rs. 75 lakhs have a LTV ratio of 75%. We have covered this change announced by the RBI in the LTV ratio in detail in an earlier post. Guidelines Related to Home Loan Insurance:

  • Owning a house offers a great sense of security to the house owners. However, if the house is bought with the help of a loan and God forbid the primary bread winner and the person who pays the EMIs passes away this security could be snatched from the dependents. Thus it is advisable for the borrower to get home loan insurance as a safety net against such an eventuality or other unfortunate events like loss of income or disability etc. Even though getting an insurance cover is in the best interest of the borrower, whether the borrower wants it or not is his/her choice. The type insurance policy he/she chooses and from where he/she intends to buy it also the borrower’s prerogative.
  • Sometimes banks may insist that the borrower take the insurance from them or they may bundle it with the loan without the knowledge of the borrower. This may be done by the bank due to the high commission they receive for selling the insurance product and also to safeguard their own interest. However, no RBI guideline makes it mandatory for a borrower to buy insurance at all or buy it from the lender. If the bank insists so it amounts to mis-selling. The lender can insist that the borrower takes an insurance cover but the borrower is free to choose the policy type and the insurer.

  The above are a few important RBI rules for home loan in India. These rules impact your decision about taking a loan and as well as repaying it; hence they are important. SwitchMe is an end-to-end service that helps you with everything related to your Home Loans – identifying the right lenders to figuring out the best tenure, interest rates to even balance transfers. Are you struggling with RBI home loan guidelines? Signup for expert advise and hassle-free home loan experience. Our customer Mrs. Archana Gaikawad says “My experience with Switch me was excellent. Informative and cooperative staff. 360 degree support offered by switch me team.”

Nidhi Maini

Nidhi is a reular content contributor for SwitchME. She comes with a Masters in Business Management in finance from Dayalbagh educational institute. She started her career in the operations division at ICICI bank. Nidhi then moved on to Axis Bank as a Deputy Manager. Her experince in Banking institution gave Nidhi an up-close experience of banking, financial services and needs of banking customers. Nidhi has been steering her own career with freelance content writing ever since. Her content experience spans finance, credit and home loans.

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  1. Syed Irfan Ahmed
    Apr 14 2018 at 1:05 pm

    I have just closed a home loan for my Flat with IndiaBulls and paid my amount but they have charged me fore closer charges on my home loan which is on individual and my co applicant is my wife and my other co applicant is my company
    but my EMI was paid from my savings account only.
    they said to me if company comes as a co applicant then i have to pay the Pre closure charges.
    is it right what they said because they only were not sure and were searching internet when i informed them no pre payment charges on an a floating rate .
    what i have to do if they have charged me for wrong because on all RBI Websites it says no charges but i paid 88000/- rs which was very painful for me as i was short of money.
    i have never bounced a single EMI in my 15-16 months on tenure .
    I was very unhappy as i had only paid interest for these months mostly if we calculate.

    need an answer to this
    Awaiting your reply

    Syed Irfan Ahmed

  2. Ashwin
    Apr 02 2018 at 4:09 pm

    Hi Nidhi what is the source of this article. I am applying for a home loan with PNB and those guys are forcing me to buy an expensive insurance. I need to justify with exact rule from RBI. Kindly help.

    • Suma Ganesh
      Suma Ganesh
      May 11 2018 at 5:07 pm

      Hi Ashwin,
      Thank you for writing in to us.
      RBI circulars are available on https://rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9048#mc
      Home loan insurance is not mandatory. However, it is in the interest of your bank and your family that you invest in a home loan insurance.
      You need not take a home loan insurance from PNB. You can take it from any source you want.

  3. Umang
    Jan 10 2018 at 10:57 pm

    I and my father hold a flat. I’m paying loan for it. Now I want to sell that flat to my younger brother and want t buy a new house. will my brother get home loan for the flat as its a blood relation. most banks are denies.

    • Suma Ganesh
      Suma Ganesh
      Jan 22 2018 at 11:14 am

      Hi Umang,
      Father and son can jointly apply for loan.
      Some points to note are:
      – Both must be joint owners of the property too
      – The maximum loan tenure will be the number of working years your father has left in this case

  4. P. Kasi Visweswara Rao
    Oct 20 2017 at 8:04 pm

    (1) i and my father purchased one residential flat and we took loan from DHFL.
    (2)My wife purchased two flats in her name. City Bank and DHFL sanctioned two home loans for these two flats and I am the Co-borrower for these two loans.. Though both properties are registered in my wife”s name,, DHFL treated me as first applicant and my wife is the second applicant as far as DHFL loan is considered.
    (3) Now I want to purchase another flat in my name and my wife will be the co-borrower for the proposed loan. Am I eligible for concessional interest rate, (as applicable for the second house), for the proposed home loan?. The proposed flat is the second house in my name As a co-borrower,. I have not claimed any IT deduction from the existing loans as far as the loans availed by my wife.. . .

    • Suma Ganesh
      Suma Ganesh
      Oct 24 2017 at 10:46 am

      Hi Kasi,
      Thank you for writing in to us.
      Are you referring to concession from your bank on second loan?
      In general, banks do not offer discounted interest rate for additional loans.
      However, if your loan account has been regular and your joint incomes justify the loan amount, your bank should be happy to approve your loan.