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A prepayment penalty is a fee or charge, that you need to pay to the bank if you opt to repay a loan before the end of its term.RBI allows banks to calculate prepayment charges only on the outstanding loan amount. Typically, the longer you’ve had your loan, the lesser your outstanding loan, and therefore the smaller your penalty. 

Floating rate home loans taken by individuals are exempt from prepayment fees. For others, banks charge a prepayment penalty of 2-3% on the outstanding loan amount at the time of prepayment.

As a borrower, it’s natural to plan to close your loan before time to scale back your borrowings and monthly interest burden. However, make sure to check the prepayment penalties to decide if the savings are worth it.
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