As an individual, you would always want to be free of any debt. It is this feeling that encourages
you to consider repayment of your home loan as early as possible. The prepayment clause in your
home loan agreement allows you to pay off the outstanding balance in the event of you having some
amount of surplus funds with you prior to the end of the loan tenure. You can repay the housing
loan either in part or in full. If you make a part payment, the outstanding principal reduces and
the EMI or the loan tenure decreases.
Home loan prepayment is a good idea, but some of the aspects that you need to take into account prior
to prepaying the loan are as follows:
Most lenders specify a prepayment penalty, the fee/charge that you should to pay if you want to repay
the loan before the completion of its tenure. You may prepay the loan with the funds you have in
your savings account or by transferring the loan to another bank so that you can enjoy a lower
interest rate. Lenders charge a fee for early repayment because they will be losing out on their
Home loan Prepayment Rules
As regards the home loan prepayment rules, the Reserve Bank of India (RBI) issued a circular in 2014 stating the prepayment
rules for lenders. The National Housing Bank has communicated the same to banks and housing finance
companies (HFCs). These are as follows:
Banks and HFCs cannot charge any prepayment fee in the following situations:
- You have opted for a floating interest rate on your home loan. No penalty can be levied either
on part or full prepayment.
- You have opted for a fixed rate home loan and you are prepaying from your own sources. Prepayment
penalty will be applicable when you borrow from another lender to prepay your loan.
- You make a prepayment when converting your home loan into a floating rate interest loan.
As per RBI rules, banks can charge prepayment penalty only on the loan amount that is outstanding.
Typically, the prepayment penalty is 2 to 3 percent of balance outstanding at the time of prepayment.
Check the home loan prepayment rules specified in your home loan agreement carefully and ensure
that they comply with RBI's stipulations.
One of the key home loan prepayment advantages is a reduction in the interest burden. This, in turn,
brings down the cost of your house. However, it can turn out to be tricky if you are not well informed
of the formalities involved and charges payable. Getting rid of the liabilities might seem attractive
when you get some extra money through a pay hike, promotion, or new job, but you should consider
a few things before prepayment:
- Prepayment works to your benefit if you do not change your EMIs. When you prepay, you can either
reduce the EMI or loan tenure.
- You save more interest by prepaying early. So, if you are considering prepayment, you should
do it during the early stages of your home loan and not towards the end.
- Calculate the benefits you accrue because of prepayment.
- Consider the tax benefits offered by home loans.
- Consider partial prepayment instead of full prepayment. Investments may fetch you better returns
under certain situations.
Most people in India need to avail a home loan to fulfil their dream of having their own residence.
There are advantages and disadvantages to availing a home loan. While a couple of advantages are
tax benefits and capital appreciation, the main disadvantage is that it is a long-term financial
commitment. Therefore, you should choose your home loan wisely by developing a clear understanding
as to what it entails. You should put in some amount of effort for this purpose. If you are a busy
person, you could start your research by going through this home loan guide which touches upon
all of the key aspects related to home loans in brief. Ultimately, you have to decide your budget,
based on your specific needs, and borrow an amount that you will be able to repay without any hassles.