Home Loan Prepayment 2024 – Charges & Payment Process

Home Loan Prepayment is divided into two sections that are part and complete prepayment. And it helps you to save money over the interest payments and reduce the loan tenure. Read this article to know more about home loan prepayment rules, calculator, charges, advantages, and disadvantages.

Home Loan Prepayment

The home loan prepayment option helps loan borrowers to repay the home loan before the completion of the loan tenure. 

The home loan prepayment is also possible as a part or full prepayment.

The main factors to look up to before deciding on home loan prepayment are

• Need of Funds

Before opting for the home loan prepayment, you should have sufficient funds available for your other financial needs.

So that you can manage the fund needs during emergencies.

• Income from Investment

The prepayment amount should be compared with the return that can be earned over the other investments.

If you have the possibility of earning a higher return compared to home loan interest then home loan prepayment is not the best option. It can be done later.

Part Prepayment of Home Loan 

The home loan part prepayment allows you to pay off a considerable portion of the home loan principle before it’s due.

This benefits you by saving on overall interest payments. And helps in the reduction of EMI, tenure, or both.

No defined limit is there to specify the maximum amount. But the minimum amount defined for prepayment is cannot be less than three EMIs.

Complete Prepayment of Home Loan

The complete prepayment of the home loan will lead to the official transfer of the property in the name of the borrower. 

And frees the borrower from any kind of financial liability of the home loan.

Home Loan Prepayment Rules

The guidelines and rules provided by the Reserve Bank of India for both Housing Finance Companies and banks are mentioned below.

Penalty Imposing Criteria

The following are the cases where HFCs and banks can impose a prepayment penalty.

• Individuals who have claimed Dual Rate Home Loans Scheme

For such individuals, the rate of interest is kept the same for the initial years. And later floating rate is applied. 

The banks can impose a prepayment penalty for this scheme.

• Fixed Home Loan Interest Rates claimed from HFCs

If the individual borrowed money from another HFC or bank to repay the loan. 

In such scenarios, HFCs can impose a prepayment charge.

• Fixed Home Loan Interest Rates claimed from Banks

In case an individual claimed a home loan with a fixed interest rate from a bank, a prepayment penalty will be imposed as per mentioned in the loan agreement.

• Non-Individual Borrowers

HFCs and Banks can impose the prepayment penalty for non-individual borrowers

Penalty Not Imposing Criteria

The following are the cases where HFCs and banks cannot impose a prepayment penalty.

• Dual Rate Home Loan shifted to Floating Interest Rate

An individual did a prepayment when the Dual Rate Home Loan was got shifted to a floating interest rate.

In such scenarios, no prepayment penalty will be imposed.

• Prepayment is done using your own money

An individual did a prepayment using his/her own money without borrowing from HFCs/banks.

In such scenarios, no prepayment penalty will be imposed.

• Individuals who claimed a Home Loan with Floating Interest Rate

No prepayment penalty will be imposed if an individual claimed a home loan with a floating interest rate.

You can check out home loan from NBFC Vs Banks comparison to know the main differences, advantages and disadvantages of each of them.

Steps for Home Loan Prepayment Process

The below-mentioned are the steps to follow to complete the part or complete prepayment of the Home Loan.

Step 1 – Clarify your bank with a written letter mentioning the willingness for home loan prepayment.

Step 2 – The home loan prepayment amount should be more than 3 times your EMI.

Step 3 – Over the complete prepayment of a home loan, you can ask for an official document provided by you, unused cheques, and NOC mentioned about no dues left. 

And request another NOC from the bank/lender stating both borrower and lender have agreed to pay off the loan.

Home Loan Prepayment Charges

As per the RBI guidelines, individuals who claimed a home loan at a floating rate are free from paying prepayment charges.

Whereas the banks can impose prepayment charges on hybrid or fixed loans. The charges range from 2-3 % of the remaining loan amount.

Home Loan Prepayment Calculator

Mr. Arun claimed a homeloan from the bank. The loan details are mentioned below.

Loan Amount – Rs. 20 lakh

Tenure – 20 years

Interest Rate – 9 percent per annum

So without any prepayment, the payable EMI amount will be Rs. 17,995.

Let’s assume, Arun did a prepayment of Rs. 1 lakh.

Later, the EMI will be reduced to Rs. 17095 (after prepayment).

So there will be a reduction of Rs. 900 every month on EMIs i.e. 5% EMI savings.

Now, Arun can still keep the EMIs at Rs. 17995 to reduce the tenure of the loan.

Home Loan Prepayment: Reduce EMI or Tenure? 

Home loan providers like banks help individuals by providing options like tenure and EMI reduction for those who want to do prepayment.

The individual seeking EMI reduction will have near to same tenure.

Whereas, the individual seeking tenure reduction will have reduced EMI.

So seeking tenure reduction will be a good decision as it helps in higher interest cost savings compared to EMI reduction.

Advantages of Home Loan Prepayment

The following are the significant advantages of home loan prepayment. And it helps to know why to choose home loan prepayment.

• Save Money through Interest

Home Loan prepayment will help to save on interest and reduce the loan tenure. 

To maximize savings on interest payments, the individual should do the home loan prepayment as early as possible.

• Helps You Focus on Other Financial Needs

Prepayment helps you to become debt-free as early as possible. And helps you to focus on other financial needs.

As you save money on interest, you can use that money to do investments. And this also provides peace of mind to the loan borrowers.

• Exemptions on Prepayment Charges

As per the RBI guidelines, individuals who claimed a home loan at a floating rate are free from paying prepayment charges.

HFCs and banks cannot impose a prepayment penalty on such home loans.

Disadvantages of Home Loan Prepayment

The following are the disadvantages of home loan prepayment. And it helps to know the things to be aware of before home loan prepayment.

• Unable to claim Tax Benefits 

The individual can avail of the tax benefits on the interest and principal amount of the home loan. 

Whereas the home loan prepayment leads to the minimize the remaining principal amount and the interest. So this leads to missing out on tax benefits.

However, the tax benefits depend on the tax slab the individual fall under.

• Arranging the Prepayment Amount

If the individual’s income is less then arranging the prepayment amount is tough. 

As home loans are basically for the long term, arranging the prepay amount in the initial years is a bit difficult.

When not to seek Home Loan Prepayment?

The scenarios when not to do home loan prepayment are

• If you have other higher-interest debts.
• If the individual’s income is been reduced.

In these scenarios, the prepayment charges and the remaining loan amount payment will imbalance your financial condition. 

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