ICICI Bank waived pre-payment charges on floating rate housing loan effective from November 23, for both new and existing customers. This is applicable for partial or full prepayment of home loan. The private bank was the last of big lenders in home finance to continue to impose a penalty on borrowers who chose to close their loan account even if it was from their own resources. Now any floating rate loan can be repaid without penalty.

Floating rate home loans, which did not reflect market rates when they fell, would now become more faithful to their name.

According to a report by rating agency ICRA, there is already a high level of pre-payment in home loans. The rating agency has completed a study of home loan portfolios that have been securitized and subsequently rated by ICRA. The median monthly pre-payment rate has been around 1.1%. Banking sources say that in a falling interest rate regime, the absence of pre-payment charges will put pressure on banks to keep revising their rates in line with those prevailing in the market. If there is a surge in pre-payments, it will affect banks that have securitized and sold their home loan portfolios.

Other Banks such as State Bank of India, HDFC and LIC Housing Finance had discontinued pre-payment charges earlier this year. While SBI had done away with all prepayment charges, including those for refinanced loans voluntarily, HDFC and LICHF discontinued with pre-payment penalties following a National Housing Bank directive in October . Other public sector banks and Axis Bank in the private sector did not have a pre-payment penalty on floating rate loans. Other banks have done away with charges following moral suasion from RBI.