Prepayment in a home loan means repaying a loan in part or in full before the completion of the loan tenure. It can be an ideal solution for individuals who are looking for ways to reduce their debt burden. Further, it allows borrowers to save substantially on the total interest payable and boost their credit score.
Eligible borrowers can utilise any surplus cash lying idle with them to prepay their home loans. But, what is the eligibility? Is there a prepayment penalty? Read on to know all the details about home loan prepayment.
All home loan borrowers can choose to prepay their home loans provided their lending institution offers this facility on their chosen loan product. Enquire about the prepayment option while applying for a home loan.
Note: A few lenders may allow individuals to make a specific number of prepayments per year following the completion of a pre-specified lock-in period. Also, borrowers may need to bear nominal charges when prepaying their home loans.
Also read: How To Choose Banks/NBFCs For Home Loans?
According to the RBI guidelines, financial institutions can impose prepayment charges only on the outstanding loan amount. Usually, the prepayment charge ranges from 2% to 3%.
Here are the various situations when banks and HFCs can levy prepayment charges in relation to a home loan:
In 2014, RBI issued a circular that stated the rules in relation to home loan prepayment. As per the regulation, banks, as well as housing finance companies (HFCs), will not be able to impose prepayment charges in these scenarios:
There are different ways in which individuals can choose to prepay a home loan. Borrowers can pay the outstanding amount in full ahead before the completion of the loan tenure, or they may opt for partial prepayment of the home loan during the course of the loan. A combination of both is also possible. Listed below are a few best ways you can prepay your home loan:
Paying a certain sum of money as a down payment against your loan will reduce your debt burden significantly. With a lower debt burden, your interest rate will be lower. Also, your overall prepayment amount will get reduced.
But how much should be the down payment percentage? You can consider paying 20% – 30% of your loan amount as a down payment. However, consider your financial situation before making that commitment.
Every year, individuals can pay a fixed amount towards the principal. However, this amount has to be more than the EMI value.
Borrowers can reduce their debt burden considerably by paying over and above the calculated home loan EMI every month. For instance, if an individual chooses to increase his/her EMIs by Rs. 5000 per month, on a home loan of Rs. 20 lakh, after the 11th year of repayment, he/she can save up to Rs. 2.4 lakh on total interest payment. The loan payment tenure, in this way, will also get reduced by about 36 months.
Another way to reduce the loan burden is to start by paying a small sum as a prepayment and gradually increasing the amount each year at a fixed rate.
In case individuals have surplus funds at their disposal, they can pay the entire outstanding amount before the tenure ends. This will be known as loan foreclosure.
Home loan providers may impose charges for prepaying the full amount. Take note of the specific charges imposed by lenders before proceeding. Apart from prepayment charges, borrowers must also take note of the interest rates applicable on home loans.
Planning a home loan prepayment is easier with a prepayment calculator. Here’s how to use it.
A home loan prepayment calculator lets you calculate how much you might save on interest and how much it will affect your EMI in case you decide to foreclose your home loan. All you need to do is enter the loan amount, tenure, rate of interest, instalments paid, and prepayment amount to see the results.
Individuals can use a home loan prepayment calculator to compute how much they can save by prepaying their home loans partially/fully. They’ll have to enter the following details:
After entering the values of the above-mentioned particulars, one can determine these three vital aspects.
Let’s understand this with an example.
Let’s say you have a loan of Rs.20 lakh
Tenure – 20 years
Interest Rate – 10% p.a.
Using an EMI calculator, you will see that your EMI is Rs.19,300.
Now let’s say you prepay Rs.5 lakh at the end of 15 years. You will be saving around Rs. 2,06,867 on interest with the tenure reduced by 3 years or 36 months.
In 2014, RBI issued a circular for banks regarding certain prepayment rules. Since then HFCs (Housing Finance Companies) have followed suit, abiding by the loan prepayment-specific rules as set by the Reserve Bank of India. Here are the guidelines:
2. Banks and HFCs cannot charge a prepayment penalty:
It is the month in the loan repayment period when you completely repay the full loan amount in advance. For example – If your loan tenure is for 6 years (72 months), and you decide to make a full prepayment by 4 years 6 (54) months, then your foreclosure month will be the 54th month.
Banking institutions normally charge 1% – 4% on the payable amount as foreclosure charges. Certain loan providers do not charge this amount as well. Check these charges before applying for a loan.
Home loan prepayment depends on factors such as the interest rate, prepayment charges, tenure of the loan and availability of funds. However, prepaying a home loan is an excellent way to cut down on interest payable, boost your CIBIL score and become debt-free sooner. But you must take note of the charges incurred during prepayment. You must carefully consider these factors and future financial goals before deciding on home loan prepayment.
Ans: The minimum part payment amount is generally equal to the EMI amount that a home loan borrower has to pay. However, there may be additional riders according to the loan’s terms and conditions.
Ans: Yes, you can use the balance transfer facility to reduce the total payable amount.
Ans: Home loan prepayment charges depend on whether you have taken a fixed rate or a floating rate loan. For floating rate loans, banks don’t levy any prepayment fee unless you’re taking a loan from another HFC to prepay your loan. For fixed-rate loans, banks and HFCs have the right to impose a prepayment fee. The fee is based on the principal outstanding.
Ans: This may vary from lender to lender. Some lenders allow part prepayments with terms and conditions while some lenders don’t. Check with your lender to understand if you’re allowed to do part prepayments against your home loan.
Ans: Repaying the entire loan is known as home loan repayment. On the other hand, partly repaying the outstanding amount is known as prepayment.
Ans: Any borrower planning for a home loan is eligible to avail of this facility. However, you will have to check with your bank if the loan prepayment facility is on offer while applying for this loan.
Ans: Foreclosing a loan will have charges levied. If this penalty exceeds your interest saved on the loan, then it does not make sense to pre-close or foreclose any loan.
Ans: A few other ways to reduce the home loan repayment burden are to opt for a higher down payment at the very outset, avail of balance transfer facilities or even foreclose the loan if convenient.
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