In the event of a recent hike in CRR and expected increase in home loan rates, it may be a good idea to break investments and prepay loans ahead of time.

Before deciding in favour of prepayment, make sure you have enough reserves set aside to see you through a rainy day or a sudden crisis. Or else you will be forced to repeat the cycle: another loan, another interest rate structure, also the saga of prepayment penalties begins...

So what is prepayment penalty?

It is a practice adopted by banks across the world to primarily cover two kinds of costs. The banks raise deposits at a cost and so the funds come at a price. They may not have the right to prepay these deposits/loans back to their lenders and hence may continue to incur a cost. The prepayment penalty helps the banks in mitigating these costs.

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