Interest rates have been rising ever since this year began. Even during 2007, there were continuous fluctuations in the interest rates of home loans.

Another development that took place was banks offering lower interest rates on housing loans to new customers.

To deal with the hike in interest rates and get the benefit of reduced rates (which were for floating rate loans exclusively at one point in time!), most consumers decided to pay off the loans with existing banks and transfer loans to banks offering cheaper loans…

All’s well till this point. What happens when one transfers a home loan from one bank to the other is that certain charges are payable, one of which is the prepayment penalty. Banks charge this fee to compensate for the loss of their income from the loan. The question here is, is it justified?

To me, personally, it is very unfair of the bank to charge a penalty to a consumer who is just trying to save his money. For one, most banks do not reduce interest rates for existing consumers; the newer ones are known to get lower deals. So, the option left for such a loan consumer is to transfer the loan. Other consumers may opt for a loan transfer because they think that their lender is charging higher rates as compared to the other lenders in the market. In both the cases, it does not seem fair on the part of the bank to charge a prepayment penalty.

But, to look at it from the bank’s point of view, the charge of the penalty seems completely justified.