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Prepayment of Home Loan: Charges & RBI Rules

By Finserv MARKETS - Aug 13,2019
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Tips to Plan Your Home Loan EMI

Owning a home of your own is a dream for most people. However, with the ever-increasing real estate prices in the Indian Markets, this dream it is extremely difficult for a majority of the Indian population to turn into a reality. The residential property prices are especially high in Metro cities like Mumbai, Pune, Bangalore, Hyderabad, Chennai, and Kolkata. As a result, a majority of people residing in these cities have to resort to a home loan.

While availing a home loan at financial platforms such as Finserv MARKETS is not much of a hassle, a majority of people are still averse to take the benefit of this facility owing to the concerns involving the burden of loan repayment. However, these days, a lot of loan providers, including Finserv MARKETS, offer flexible loan repayment facilities. One such flexible repayment facility is home loan prepayment.

Home Loan Prepayment

Prepayment of home loan involves making early repayments on your home loan, either in part or in full. Home loan prepayment is a good idea when you come across some spare funds. You can use these funds to pay your EMI dues before the stipulated loan tenure. Even if you manage to repay a part of your home loan before time, it will help save a lot on your interest rates and bring down the next EMI amount.

Is Pre-Payment of Home Loan Beneficial?

Every borrower needs to meet the home loan eligibility criteria to qualify for a home loan. This ensures that you can repay the loan amount effortlessly without defaulting. Failing to meet the eligibility criteria may lead to rejection of your loan application. This leaves a negative mark on the individual’s credit profile. So, ensure to complete the processing faster and smoothly by fulfilling the required eligibility criteria.

Home Loan Prepayment is financially beneficial for Home Loan Borrowers. It helps to reduce the Interest burden thus overall cost of the property. Any type of debt including home loan is not good for the financial health of an individual. The average home loan tenure in India is 8 years which means the prepayment of home loan is preferred by borrowers to clear off their loan. Normally, home loan prepayment is done when we receive an annual bonus or any exiting investment mature.

Home Loan Prepayment is beneficial for borrower but a financial loss for home loan provider. Banks borrow money based on long term commitment. Funds received through Home Loan Prepayment needs to be re-deployed by bank through credit channel which is cost to banks. Normally banks discourage borrowers to prepay. One of the most common way to discourage is that bank refuse to accept prepayment if the borrower is unable to visit the branch physically. Visiting the bank to do the work is not feasible for everyone, this ultimately leads the borrowers to refrain from making prepayment.

It is surprising that facility of online prepayment is not enabled by almost all Home Loan providers for prepayment of Home Loan. If borrowers are not present physically then he/she can issue letter of authorization to any of his representative who can make Home Loan prepayment on the behalf of borrower. There are no restriction in this regard as the banks point out.

Are there any Home Loan Pre-Payment charges?

Not many banks or non-banking financial companies (NBFCs) are in favour of the idea for home loan prepayment. This is because when a borrower prepays his/her home loan, he/she ends up repaying lesser to the bank or NBFC as compared to what he/she would have paid during the entire tenure of the home loan. In some cases, they even charge a prepayment penalty.

A prepayment penalty is generally levied on home loans that are taken at fixed interest rates. This penalty is levied to cover the loss of interest on the home loan to the loan provider. A home loan prepayment penalty can range anywhere between 0.5%- 3% on the outstanding loan amount, depending on the terms and condition of your loan agreement. The borrowers who have availed a home loan at floating interest rates are generally exempted from home loan prepayment charges.

Home Loan Prepayment Calculator

Depending on whether the borrower opts to make prepayment on your home loan in full or in parts, your prepayment charges will vary. In order to determine how much prepayment charges he/she will have to pay, the borrower can take the help of a home loan prepayment calculator.

There are several loan providers that offer home loan prepayment calculator online. You can estimate your prepayment charges through these online calculators by submitting the following details-

  • Entire home loan amount
  • Home loan tenure
  • Rate of interest on your home loan
  • The amount you wish to prepay

Important RBI Rules You Need to Know About Home Loans

To ensure that the borrower does not end up paying unnecessarily heavy prepayment charges, the Reserve Bank of India along with the National Housing Bank (NHB) has stated certain rules with respect to home loan prepayment.

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Situations when banks or housing finance companies cannot charge a penalty-

  • No prepayment charges should be levied on home loan taken with floating interest rates
  • When the prepayment of a home loan is done by the borrowers with their own source of income, the housing finance companies are not allowed to charge any prepayment penalty
  • If the borrower decides to shift the home loan from fixed interest to a floating interest rate, he/she cannot be charged with any prepayment charges

Situations when banks or housing finance companies can charge prepayment penalty-

  • Borrowers who avail home loans at a fixed interest rate can be charged with prepayment charges
  • Procurement of a home loan from ‘non-individuals’, e.g: co-borrower or a third-party such as a company or firm, will be liable for prepayment charges

It is important that borrowers know these RBI guidelines in order to ensure that they do not end up paying unnecessarily extra prepayment charges on their home loan. It is highly recommended that at the time of availing a home loan, the borrower goes through the terms and condition of the loan agreement to know about the consequences of home loan prepayment.

For home loans at attractive interest rates, apply for the Bajaj Finserv Home Loan at Finserv MARKETS. Apply today and benefit from features like flexible repayment, complimentary value-added services, and balance transfer options. To know about the eligibility criteria and documentation required, get in touch with our representative now!

“Finserv MARKETS, a subsidiary of Bajaj Finserv, is a one-stop digital marketplace that has been created for consumers on the go. It offers 500+ financial and lifestyle products, all at one place. At Finserv MARKETS, we understand that every individual is different. And that’s why we have invested in creating a proposition – Offers You Value. A value proposition that ensures you get offers which are tailor made for you. We also offer an amazing product range and unique set of online offers across Loans, Insurance, Investment, Payments and an exclusive EMI store. Be it in helping you achieve your financial life goals or offering you the latest gadgets, we strive to offer what you are looking for. From simple and fast loan application processes to seamless and hassle-free claim-settlements, from no cost EMIs to 4 hours product delivery, we works towards fulfilling all your personal and financial needs. What’s more! Now enjoy the same benefits in just one click with our Finserv MARKETS App.”

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522