Have you been caught on the wrong foot while prepaying your home loan? Particularly,

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when you decided to shift to a competing lender, which offered refinance at a much lower rate?

This practice is frowned upon, but bankers cite ‘cost of money’ as the reason to defend it. But now, there's a change happening. Axis Bank, the third largest private sector bank by assets, has taken the lead in scrapping this practice on home loans. The bank has decided not to charge pre-payment penalties to its home loans even when customers shift a loan to a competing bank.

Others, including State Bank of India, Housing Development Finance Corporation and ICICI Bank impose pre-payment penalties when any of their customers seeks to refinance a home loan through fresh loans at lower rates.

Axis Bank is the only bank that does not charge any pre-payment penalty from home loan customers either for part pre-payment or full pre-payment.

SBI and Punjab National Bank have no pre-payment charges if the customer prepays from own resources or if half of the loan is repaid. But if the pre-payment is to be refinanced by any other institution or bank, the customer has to pay 2 per cent penalty on the money paid.

“At Axis Bank, we believe customers have the right to exercise their choice to shift if they find a rate advantage,” said Manju Srivatsa, president of retail banking

at Axis Bank.

Axis has close to 50 retail asset centres, which are specialised units dedicated to processing retail loan applications ensuring quicker turnaround time.

Though a small player in the market, Axis Bank's new CEO Shikha Sharma is bullish about growing the bank at a pace it has never seen before. The retail business is expected to fuel a substantial part of the bank’s growth.

The bank had a home loan book of Rs 12,049 crore at the end of the second quarter. It plans to grow its market share through customer-friendly home loan products with a variety of repayment options, like extended tenures, lower rates of interest and quick processing time.

HDFC allows pre-payment of only 25 per cent of the opening balance at a time without any charge. For any amount over and above that, there is a pre-payment penalty of 2 per cent.

ICICI Bank allows pre-payment of a loan if 12 equated monthly installments (EMI) are kept as outstanding. In case of complete closure of the loan, the bank charges a penalty of 2 per cent of the amount prepaid.

HDFC managing director Renu Karnad Sud said, “Instead of expanding the home loan market, banks are only refinancing through teaser schemes. Pre-payment penalty is charged by banks and institutions because we have a cost to our funds and if we pre-pay, we have to pay a penalty to our lenders. We do not want to penalise customers. We only discourage them from borrowing from other banks to prepay us.”

Axis Bank also has a longer repayment period of 25 years instead of 20 years most players have today. The bank also has a bouquet of innovative home loan products targeted at different category of customers.

For example, it has an extended tenure loan targeted at the young salaried group, who aspire to buy a home with smaller EMIs and a longer repayment period.

“This is to encourage youngsters who have begun earning to buy an aspirational property. This category does not want a huge EMI outgo, but does not mind an extended tenure. The average loan size is Rs 12 to 15 lakh and these schemes have helped us maintain a year-on-year growth of 25 to 30 per cent,” said Srivatsa.

Axis Bank's ‘Step Down home loan’ targets families where parents are nearing retirement and children ha­ve just started earning. The loan is structured in such a way so as to offer higher EMIs at the start and lower installments at a later stage.

These are all floating rate loans with an interest rate of 8.75 per cent for loans up to Rs 30 lakh and 9.25 per cent for loans above Rs 30 lakh.

Axis Bank also has a special home loan scheme that offers an interest rare of 8 per cent for the first year and floating rate for the remaining tenure of the loan where it competes with SBI, the pioneer of the 8 per cent home loan scheme.

At present rates, the interest rates applicable for customers from the second year will be 8.75 per cent for loans up to Rs 30 lakh and 9.25 per cent for loans above Rs 30 lakh.