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.
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.
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.
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.
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.
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
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.
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.
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.
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