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✓ Home Loan from ₹2 Lakhs To ₹15 Cr ✓ Multiple Lending Partners ✓ Interest Rates Starting @ 8.25%

Home Loan Prepayment

Home Loan prepayment refers to the act of making a lumpsum payment towards a home loan ahead of the due date. To initiate a home loan prepayment, a borrower must be willing to pay up at least 3 equated monthly instalments (EMIs) worth of money upfront. A borrower can either prepay a home loan either partially or fully. Home loan prepayment can lead to one of three things, namely a reduction in the EMI amount, shortening of the repayment tenure, or complete foreclosure of the loan account. This article will tell you everything you must consider before opting for a home loan prepayment.

Benefits of Prepayment of Home Loan

  • 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 existing investment mature.

  • It is surprising that the 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 a letter of authorization to any of his representatives who can make Home Loan prepayment on the behalf of the borrower. There are no restrictions in this regard as the banks point out.

What is a Home Loan Part Prepayment Calculator

A home loan part prepayment calculator helps the borrower ascertain the EMI amount he or she will have to pay after they have prepaid a portion of their outstanding principal amount. While getting the same determined, any form of applicable fees is also factored in.

How the Home Loan Prepayment Calculator Works

Let us now look at how this tool works exactly. As an example, we are going to assume the following numbers for illustration and elaboration purposes:

  • Principal Home Loan Amount = ₹40 Lakh

  • Tenor = 20 years

  • Rate of interest = 9% p.a.

With the help of the housing loan EMI calculator, you will get to see the figure ₹35,990, which will be your monthly outflow towards the prepayment of your home loan.

Let us now say that you prepaid a sum of ₹2 Lakhs in one go, which will consequently bring your EMI amount down to ₹34,190, implying that you will save ₹1800 every month. Alternatively, you can choose to not get any changes made in your monthly EMI amount and get the repayment tenor of the home loan reduced instead.

A tool like this will almost always help you figure out as to how you can pay off your loan much faster.

How to use Home Loan Prepayment Calculator

In order to make use of the home loan part prepayment calculator, the borrower will have to determine variables such as:

  • The principal amount itself

  • The portion of the amount in question that they plan on prepaying

  • The foreclosure charges (if any)

  • The original length of the repayment tenor, and

  • The applicable interest rate

After the aforementioned variables have been ascertained, they will be put into the online calculator tool in order to determine the final EMI amount that they will be required to pay post prepayment.

When banks 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

When banks 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.

Home Loan Prepayment Charges

When it comes to home loan prepayment, the borrower must keep one thing in mind that may have to pay an additional fee or a small number of them. These are generally charged by the lenders themselves and are known as home loan prepayment penalties. But, it is not necessary for a borrower to be subjected to that, as the levying of foreclosure penalty charges will depend on factors such as the type of interest rate which is applicable and the kind of lender that has granted the home loan amount to the borrower. The source of the funds which is being used to prepay the loan is a factor that is taken into consideration as well at the time. Either the borrower can take a loan from some other bank and prepay their Home Loan or they may take care of it from their own pocket. If in case it is the former, foreclosure penalties may be applicable.

Details about Prepayment Penalty

  • 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 less 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.

Why do Lenders Charge Home Loan Prepayment Fees

As has been mentioned before, banks or housing finance corporations tend to charge prepayment fees so that they can partly make up for the interest revenue that they are losing as a result of the act. It must be noted that the money the banks bring in by way of interest revenue is essentially their lifeblood, hence they will try to earn some, if not a huge portion, of the interest income that is being lost.

Home Loan Prepayment Rules

The Reserve Bank of India (RBI) has laid out a set of guidelines that specifies the conditions under which financial institutions can levy home loan prepayment charges. Some of the key factors that are taken into consideration are; the type of financial institution that has lent the housing loan to the borrower and the kind of interest that is being charged (fixed or floating). The following list will take a deeper dive into the guidelines in question.

  • Home loans which have been applied for by companies or any corporate entities will have to pay the foreclosure charges irrespective of the kind of interest rate that it attracts. These figures, usually expressed in percentage terms, are generally mentioned in the home loan agreement itself.

  • Borrowers of fixed-rate home loans from banks will be charged a prepayment penalty, which will be as per what is stated in the agreement mutually decided-upon. Floating-rate home loan borrowers are, on the other hand, exempted from such kinds of expenses.

  • Fixed-rate home loans that have been taken from will attract prepayment penalties, but only if the borrower is repaying it with the help of a loan that is taken from some other bank or Housing Finance Company (HFC). But, if the borrower is paying out of his own pocket, the HFC is not entitled to any prepayment penalties.

  • Dual rate housing loans which have been taken up by individuals can attract prepayment penalties during the period when the loan is attracting a fixed interest rate. Once the housing loan begins to attract a floating rate of interest, the lenders cannot levy any sort of prepayment penalties.

Things to Consider Before Prepaying a Home Loan

Some of the things that borrowers must be mindful of before prepaying their home loan are:

  • Potential Savings: Prepaying a home loan in the early years of the repayment tenure can help the borrower save lakhs of rupees they would have otherwise paid as interest. But, given that the interest component of the EMIs are higher in the initial period than in the later years, the borrower will not save much if he/she repays the home loan towards the end of the tenure. This is an essential aspect you must remember before opting for home loan prepayment.

  • Alternate Use of Money: The borrower can use the surplus influx of cash to reduce their debt burden. Alternatively, the borrower can use the surplus money to make investments that earn them better returns and build their wealth. The borrower must consider alternative uses of the money and the opportunity cost of prepaying the home loan before initiating it.

  • Borrower’s Age: If the home loan borrower is close to retirement, it will serve them well to foreclose the loan and avoid defaults at a time when they do not have an income source. If the borrower is young, has a stable income source, and has other expenses to take care of, he/she must think twice before prepaying. Ultimately, the decision of prepayment lies with the borrower and they must do what works for them.

  • Future Money Requirements: The borrower must take their future monetary requirements and plans into consideration before prepaying their home loan. Although it is a good thing to get out of debt early, prepaying a home loan can deplete the savings of the borrower as it is a big amount.

  • Tax Benefits: Home Loan EMI payments entitle the borrower to home loan tax benefits under various sections of the Income Tax Act, 1961, and help them save lakhs of rupees each year. However, to avail them, the borrower must meet the conditions laid out under these sections. If the borrower makes a full prepayment, they can no longer claim the tax benefits. This, too, is a critical aspect that borrowers thinking of home loan prepayment must consider.

 

Home Loan Prepayment FAQs

✔️How are Prepayment Charges Calculated?

Prepayment charges are decided by the banks or housing finance corporations at their own discretion. They generally tend to stay within the range of 2-4% per annum. However, one can assume that they may be charged the media rate of interest, which is generally 2% give or take.

✔️Is Prepayment of Home Loan Good?

Prepayment of Home Loans allows the borrower to get their EMI amounts reduced by a considerable margin, or get significant alterations made to the length of their repayment tenor. However, while considering the same, applicable charges stated by the lenders, if any, must be taken into consideration.

✔️Does Prepayment Reduce Home Loan Interest?

Prepayment reduces home loan interest in terms of reducing the overall amount a borrower will have to pay as interest on the outstanding principal. However, alterations in the house loan interest rates itself as a result of home loan prepayment is rare. One can get their interest rate altered as well in order to reduce the overall burden, but it will depend on the kind of rapport that exists between the lender and the borrower.

✔️Is it Good to pay Home Loan Early?

It is always advisable that a Home Loan, or any other form of loan for that matter, must be prepaid whenever it can be done by the borrower, as it will ultimately take some of the credit burden off their shoulders.