Buying a house that you can call your sweet home is a cherished dream for many Indians. However, it often comes with a long-term commitment and financial burden – a home loan. When it comes to clearing your dues, deciding the best course of action can be challenging. Home loan amounts are significant, and their repayment tenures can stretch up to 40 years. In such a case, there are two strategies that you can opt for to help reduce the overall interest on your home loan.
Provided you have the financial capability, you can always choose to prepay or foreclose your home loan. However, it is important to know about the fine print of these actions before making a decision.
Prepayment is a flexible option that you can choose to pay off your loan, in part or full, before its tenure ends. You can utilise any extra funds you come across to cut down your overall outstanding principal. This reduces the interest you have to pay through EMIs or shortens your loan tenure. Hence, this strategy might be a favourable option for you to reduce your effective loan payout.
You can make partial payments into your loan account easily via online banking methods. As home loan interest is calculated on the daily reducing balance, prepayment lowers the interest and EMI as per the latest amount due in your loan account.
Partial Prepayment or Part Prepayment: In this option, your loan account remains open, and you continue with your EMIs. You simply make a partial payment of your outstanding home loan amount, so that your EMI or loan tenure is reduced. This choice may suitable if you have come across some extra cash in the form of yearly bonuses, investment returns, or other additional income.
Foreclosure (Pre-Closure) or Full Prepayment: Foreclosure involves making a full prepayment of the outstanding principal amount in one fell swoop, thus closing your loan account entirely. Foreclosing your home loan can help you reduce the interest burden significantly. Either the borrower or the lender can initiate foreclosure.
As of RBI guidelines from 2nd August 2019, all banks and NBFCs have been instructed to eliminate any prepayment/foreclosure penalty charges for term loans on floating interest rates given to individual borrowers for non-business purposes. In such cases, ensure no prepayment or foreclosure charges are included in the calculation.
Prepayment allows partial repayment of the loan amount, reducing EMI, interest, and/or tenure, while foreclosure results in the complete closure of the loan account, releasing your original documents.
Key Factors to Consider
Before deciding to prepay or foreclose your home loan, consider the following factors:
If your home loan has a floating interest rate, there are usually no foreclosure charges. However, with fixed-rate home loans, you may encounter foreclosure charges, typically ranging around 2-4% of the outstanding principal. Remember to weigh these charges against your potential savings from foreclosure.
If you have investment opportunities that offer returns higher than the interest savings from loan foreclosure, it might be more advantageous to invest your surplus funds instead of foreclosing your loan.
Prioritise paying off your higher-interest loans, like credit card bills or personal loans, over a home loan. These loans usually have a significantly higher interest rate, making them costlier to keep pending.
Ensure that you have enough funds set aside for other future financial needs, like marriage, child’s education, or medical emergencies. Allocate funds strategically to stay prepared for life's important milestones and unforeseen expenses.
You can claim tax deductions going up to ₹1.5 Lakhs on the repayment of the principal sum under Section 80C of the Income Tax Act, 1961. Besides, you can claim up to an additional ₹2 Lakhs on the interest repayment of a home loan, u/S 24. So, consider how prepayment/ foreclosure affects your tax liabilities.
Be prepared to explain the source of your funds if you choose to foreclose your home loan, as lenders and tax authorities closely monitor such cases. Maintain clear records and transparency about the origin of such funds to help streamline the foreclosure process and avoid complications.
Repaying your debts ahead of schedule is a smart financial move that fosters discipline and peace of mind. Both prepayment and foreclosure can help you achieve a debt-free life sooner. With Bajaj Markets you can check out all the terms and charges of making a prepayment or foreclosure of your home loan from the best lenders and decide on the best course of action. You can also choose a home loan EMI calculator to better understand the math behind your loan repayment.