Home Loan Prepayment

Q: Does the home loan prepayment attract additional charges?

Depending on the terms of the home loan, you may be charged a prepayment penalty.

Check Benefits of Home Loan Prepayment, Charges and Rules

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Home loan prepayment means making a lump sum payment towards a home loan ahead of the due date. You can partially or completely repay your home loan and doing so saves on the interest payable.

Home loan prepayment can help reduce the EMI amount, minimise the repayment tenure. It can also help with foreclosure of the loan. To understand the benefits of home loan prepayment and understand the working of a home loan prepayment calculator, read on.

Benefits of Prepayment of Home Loan

The home loan prepayment facility is a boon for individuals with an active home loan. One of the most important benefits of prepayment of a home loan is that it helps reduce the interest burden and the overall cost of the property.

With the average home loan tenure in India being 8 years, you may want to clear off the outstanding by using the home loan prepayment option. Normally, this facility is opted for when you receive an annual bonus or when any of your existing investments mature.

Note that the facility of online prepayment is not enabled by most home loan providers for the prepayment of a home loan.

If you are not present physically, you can issue a letter of authorisation to any of your representatives who can make home loan prepayment on your behalf. There are no restrictions in this regard as per the home loan prepayment rules set by lending institutions.

What is a Home Loan Part Prepayment Calculator?

A home loan part prepayment calculator helps you ascertain the EMI amount you will have to pay after you have prepaid a portion of your outstanding principal amount. When checking the amount, you have to factor in applicable loan processing fees and charges as well.

Here is a brief overview of how this tool works exactly. As an example, assume the following numbers for illustration and elaboration purposes:

Principal Home Loan Amount = ₹40 Lakhs
Tenure = 20 years
Rate of interest = 9% p.a.

Using a housing loan EMI calculator, you get an EMI amount of ₹35,989. This instalment amount is your monthly outflow towards your home loan repayment.

Assume you prepaid a sum of ₹2 Lakhs in one go, which will consequently reduce your EMI amount to ₹34,190, which means that you will save ₹1799 every month.

Alternatively, you can choose not to get any changes made in your monthly EMI amount and get the repayment tenure of the home loan reduced instead. A tool like a home loan prepayment calculator will help you assess how you can pay off your loan much faster.

To use a home loan part prepayment calculator, you have to determine the following variables:

The principal amount
The portion of the amount you plan to prepay
The foreclosure charges
The original length of the repayment tenure

The applicable interest rate

After you are clear about the aforementioned variables, you need to key in the details in the online calculator to determine the final EMI amount you will have to pay post prepayment.

Home Loan Prepayment Charges

When it comes to home loan prepayment, you must keep one thing in mind you may have to pay an additional fee or other associated charges. These are generally charged by lenders themselves and are known as home loan prepayment penalties.

However, such charges aren’t mandatory. The levying of foreclosure penalty charges depends on factors such as the type of applicable interest rate and the kind of lender you opted for when availing the home loan. The type of interest rate applicable on home loans also makes a difference. For instance, floating-rate loans will not carry these charges.

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 you can take a loan from some other bank and prepay your loan, or you may arrange for funds from your savings.

However, in case it is the former, you may have to pay foreclosure penalties.

Home Loan Prepayment Penalty

Not many banks or non-banking financial companies (NBFCs) are in favour of the idea of home loan prepayment. This is because when you prepay your home loan, you ultimately end up repaying less to the bank or NBFC. In some cases, lenders even charge a prepayment penalty.

A prepayment penalty is generally levied on home loans availed at fixed interest rates. This penalty is levied to cover the loss of interest on the home loan. While this penalty can vary between 0.5% and 3% of the total loan amount, note that the amount varies depending on your loan agreement terms. However, as mentioned above, floating rate loans do not have these prepayment charges.

1. When Banks Cannot Charge a Penalty

Banks cannot charge a prepayment penalty under the following circumstances:

No prepayment charges should be levied on home loans taken with floating interest rates
When the prepayment of a home loan is initiated using your own source of income, lenders are not allowed to charge any prepayment penalty
If you decide to shift the home loan from fixed interest to a floating interest rate, you cannot be charged with any prepayment charges

2. When Banks Can Charge Prepayment Penalty

Banks can charge a prepayment penalty under the following circumstances:

If you avail home loans at a fixed interest rate, you can be charged prepayment fees

When you procure your home loan from ‘non-individuals,’ such as a co-borrower or a third-party such as a company or firm, you are liable for prepayment charges

It is important to know these RBI guidelines to ensure that you do not end up paying unnecessarily extra prepayment charges on your home loan.

It is prudent to go through the terms and conditions of the loan agreement to know about the consequences of home loan prepayment when opting for a home loan.

Why do Lenders Charge Home Loan Prepayment Fees?

Banks or housing finance corporations charge prepayment fees so that they can partly make up for the interest revenue that they are losing as a result of prepayment. Remember that the money the banks earn as interest are their gains.

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 key factors taken into consideration include the following:

The type of financial institution that has lent the housing loan
The kind of interest that is being charged (fixed or floating)

The following list dives deeper into the required guidelines:

Home loans applied by companies or any corporate entities will have to pay foreclosure charges, irrespective of the kind of interest rate applicable. These figures, usually expressed in percentage terms, are generally mentioned in the home loan agreement.
If you are a borrower of fixed-rate home loans, you will be charged a prepayment penalty, as stated in the agreement mutually decided upon by both parties. On the other hand, if you are a floating-rate home loan borrower, you are exempted from such kinds of expenses.
Fixed-rate home loans will attract prepayment penalties only if you are repaying it with the help of another loan taken from some other bank or Housing Finance Company (HFC). But, if you pay the money out of your own pocket, you are not entitled to any prepayment penalties.
Dual-rate housing loans taken up by individuals can attract prepayment penalties during the period when the loan is attracting a fixed interest rate. Once the housing loan shifts to a floating rate of interest, the lenders cannot levy any sort of prepayment penalties.

Do’s & Don’ts of Home Loan Prepayment

Here is a list of essential pointers to remember when you plan to prepay your home loan.

Make sure you carry a valid ID and address proof issued by the Government of India
Carry a chequebook with you when you visit the lender for prepayment
Ensure you take an acknowledgement copy from the lender after you complete your home loan prepayment
Remember to mention your name, phone number and loan account number on the backside of all cheques
Make sure to carry the latest statement of the bank account from where you are initiating the prepayment

Updating Prepayment Details in CIBIL Database

When you complete your home loan prepayment, the lender updates the same on the CIBIL database. Hence, your outstanding home loan balance in your CIBIL report will be revised accordingly.

It takes around 45-60 days for your CIBIL report to get updated with the revised outstanding amount. This way, initiating a home loan prepayment can aid in reducing your outstanding loan amount and improve your CIBIL score.

Things to Consider Before Prepaying a Home Loan

A few points you must be mindful of before prepaying your home loan include the following:

Potential Savings

Prepaying a home loan in the early years of the repayment tenure can help you save lakhs of rupees you may have otherwise paid as interest. Given that the interest component of EMIs is higher in the initial period than in the later years, you will not save much if you repay 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

You can use the surplus influx of cash to reduce your debt burden. Alternatively, you can use the surplus money to make investments, earning you better returns and helping you build your wealth.

You must consider alternative uses of the money and the opportunity cost of prepaying the home loan before initiating it.

Your Age

If you are close to retirement, foreclosing the loan to avoid defaults is an ideal option at a time when you do not have an income source. However, if you are young, have a stable income source, and have other expenses to take care of, you must think twice before prepaying.

Ultimately, the decision of prepayment lies in your hands, and you must do what works best for you.

Future Money Requirements

You must consider your future monetary requirements and plans before prepaying your home loan. Although it is ideal to get out of debt early, prepaying a home loan can deplete your savings as it is a massive amount.

Tax Benefits

Home Loan EMI payments entitle you to enjoy home loan tax benefits under various sections of the Income Tax Act, 1961, and help you save lakhs of rupees each year. However, to avail them, you must meet the conditions laid out under these sections. If you make a full prepayment, you can no longer claim tax benefits.

This, too, is a critical aspect you must consider when thinking of home loan prepayment.

Is There Any Reason Why You Should Not Make a Prepayment?

Not every loan prepayment can yield a good impact. There are certain reasons why you may not choose to prepay your loan amount. Some of these reasons are:

Credit Score: Your credit score can be negatively affected if you choose to prepay your home loan. Credit rating agencies focus more on the debt management skills of loan borrowers. As such, closing your loan account, while beneficial, restricts your chances to establish a lengthy repayment track record.
Penalty: The foreclosure of home loan amounts may attract penalties. It may go as high as 6% of the total loan amount. So, you must only opt for closing your home loan early after knowing all about the prepayment penalties.
Loss of Savings: You will only be able to make a home loan prepayment if you have sufficient surplus money. When you plan to foreclose the loan using your savings amount, it can deplete your funds. So, considering other financial commitments of life is essential before submitting a huge chunk of money to your lender.
Loss of Tax Benefits: When you claim for tax deductions at the end of the financial year, the loan repayment of your home allows you to get a tax deduction of up to ₹2 Lakhs. Hence, if you foreclose your home loan, you may lose on tax deductions and get lower tax benefits.

Conclusion

Home loan prepayment can be an amazing option if you are looking forward to saving more on interest. For this, you can use an online tool to calculate the amount you will need to pay.

Furthermore, you can also part-prepay the loan on receiving a bonus or sudden inheritance. Before deciding on prepaying a credit, you need to consider certain factors to reap the most benefit out of this step.

Also, knowing about the RBI guidelines helps you assess whether you will have to pay the penalty for prepaying your housing loan and decide accordingly.

If you are looking to reduce the interest outgo on your home loan, you can consider the home loan balance transfer option. With this option, you can transfer your existing loan to another lender offering affordable interest rates. You can check out all details regarding home loans on Bajaj Markets.

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Home Loan Prepayment FAQs

Prepayment charges are decided by the banks or housing finance corporations at their own discretion. They generally tend to stay within the range of 0.5-3% per annum.

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

Prepayment reduces home loan interest in terms of reducing the overall amount you will have to pay as interest on the outstanding principal. However, alterations in the house loan interest rates themselves as a result of home loan prepayment are rare.

You can get your interest rate altered as well to reduce the overall burden, but it will depend on the kind of rapport that exists between you and the lender.

It is always advisable that a home loan, or any other form of loan for that matter, must be prepaid whenever you can repay it, as it will ultimately take some of the credit burdens off your shoulders.

Depending on the terms of the Home Loan, you may be charged a prepayment penalty.

The latest guidelines of RBI state that lenders can charge a prepayment penalty only when the loan is still in fixed-rate periods. Once it enters the floating rate period, borrowers will not have to pay any prepayment penalty.

The most appropriate time to prepay a loan is the initial months of the credit. This helps in saving on the interest as much as possible. Thus, it can lead to increased savings on prepaying a loan early.

Yes, all banks allow home loan prepayment unless you have signed any document that forbids it. However, the prepayment penalties vary considerably from one bank to another. Hence, you should check them before proceeding.

Repayment refers to the regular payment of monthly instalments to pay off the principal you have borrowed along with its interest. However, prepaying refers to paying the outstanding money in small parts or all at once before the completion of the loan tenure