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Prepayment Of Home Loan Research Team | Posted On Tuesday, September 04,2018, 06:19 PM

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Prepayment Of Home Loan



Prepayment of Home Loan

Prepayment is the early repayment of a Home Loan, before Loan tenure. You can prepay or close the loan by repaying it in full or in part. You can choose prepayment for reasons, like:

1.  Lower interest rate.

2.  If you get a salary hike or a windfall gain.

Prepayment penalties on Home Loans:

Banks used to charge a penalty on pre-closure of Home Loans. However, as per new RBI rules, they are forbidden from charging a prepayment penalty on Home Loans vis-a-vis floating interest rates. If your bank charges you a prepayment penalty, you can lodge a complaint with the Consumer Forum of India and the Banking Ombudsman.

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When should you go for Home Loan prepayment?

1.  If you have excess cash.

2.  If you have a floating interest home loan and rates are going up.

3.  If your lender doesn't charge a prepayment penalty.

4.  Home Loan offers tax benefits. Do a cost benefit analysis on prepay vs tax benefits.

When should you not go for a Home Loan prepayment?

1.  Any prepaid amount exceeding the deduction limits cannot be claimed as tax benefits. Therefore, if the prepayment amount exceeds the deduction limits, you may not consider prepayment.

2.  If by investing excess money in equity mutual funds or stocks, you earn higher returns than by prepaying the loan, go for it.

Note: Keeping a loan open just to claim tax benefits is fine if you don't have high loan outstanding. If the loan damages net worth by keeping it open for too long just to enjoy tax benefits, it doesn't make sense.

SEE ALSO:  13 Home Loan Terms You Must Know

Things to keep in mind before prepayment?

1.  Keep a track of Home Loan payments.

2.  Keep track of the bank statement which reflects the Home Loan EMIs.

3.  Keep a photocopy of the cheque or demand drafts of any lump sum payment made towards Home Loan.

4.  Keep all home-related documents together.

5.  Assess the pros and cons of prepaying the Home Loan. The advantages and disadvantages are unique to each borrower.

6.  Calculate the savings you can make by closing the home loan before tenure.

7.  Consider the tax benefits too.

8.  Collect an acknowledgement letter duly signed and stamped by the lender, which declares you have made a prepayment, in part or full, and that you are not entitled to pay further interest or principal if the loan is cleared. 

9.  Don't exhaust all your funds prepaying the loan. Keep some money for other commitments.

10.  The prepayment penalty is not applicable on Floating interest rate Home Loans. It is applicable to Fixed interest rate Home Loans.

Process of prepayment:

1.  Inform the lender on your decision to prepay via a written application.

2.  You will have to carry documents such as ID proof, loan agreement and so on, while making a prepayment.

3.  Carry bank statements and salary slips as lenders may ask you to furnish proof of the source of prepayment.

4.  The lender should furnish a signed acknowledgement of prepayment.

5.  In case of full prepayment of the loan, the lender should also hand over a NOC (No Objection Certificate). This should state that they have no interest in your property hereafter. It should mention your name, Home Loan account number and address.

6.  Collect all the required documents which you had submitted to the lender.

7.  Apply for Encumbrance Certificate (EC) in the Registrar Office. It is a document reflecting all the financial transactions related to the property.

8.  Make sure the closure of Home Loan is reflected in the EC. Approach the Registrar if it is missing.

9.  As you closed the loan ahead of time, update your CIBIL records as it increases credit score.

Make sure the details have been sent to the lender. It may take 20 to 30 days for CIBIL to update their records.

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