Quick Guide For Prepayment of Home Loan: What is it, How to Pay it, Charges, and More

Buying a home is a huge milestone in people’s lives. It not only provides shelter but also gives an assurance of a safe place. However, with rising property prices, homebuyers often take-home loans to fulfil their dreams of owning a home. But often, the loan amount for a home purchase is such a high magnitude that it may attract a hefty interest over its tenure. For example, a homebuyer who has taken a home loan of ₹2 crores for a tenure of 20 years at 9% per annum is required to pay an interest of approximately ₹2.3 crores. Moreover, if a home loan is taken at a floating rate of interest, the payable interest amount can rise by several notches if the interest rates increase during the tenure. One of the most innovative ways for homebuyers to save on their interest outgo is home loan prepayment.

What is the Prepayment of a Loan?

At certain times, most home loan borrowers ask, "Can we pay home loan early?" The prepayment of a home loan, or any other loan, allows a borrower to repay the loan amount before the end of its actual tenure. A loan prepayment results in a reduction of the overall interest amount that one has to pay otherwise. There are two ways in which a borrower can make the prepayment of a loan:

• Part prepayment

  When a borrower prepays a certain portion of the loan amount that has been borrowed, it is known as the part pre-payment. Making a part-prepayment of a home loan results in the reduction of the principal amount but not in the closure of the home loan account. After the part prepayment has been made, the interest is charged on the new principal amount. And either the tenure or the EMI amount gets reduced.

• Full prepayment

  When a borrower pays the entire outstanding principal of the loan amount that has been borrowed, it is known as full prepayment or loan foreclosure. Doing so results in the closure of the loan account, and the borrower is not required to pay further EMIs or interest. However, when a homebuyer decides to foreclose the loan account, one may have to bear certain charges known as the prepayment penalty on a home loan.

Home Loan Prepayment Rules

The Reserve Bank of India (RBI) has laid down certain guidelines for banks and other housing finance companies to allow the prepayment of a home loan. Some of these guidelines include:

• A borrower can make home loan prepayment only after the end of a certain period from the date at which the loan was sanctioned. One can know about this period by reading the loan agreement.
• If a home loan has been taken by a company or a corporate entity, paying home loan prepayment charges becomes mandatory irrespective of the type of interest rate that is applicable.
• In the case of individual borrowers, the prepayment of home loan charges is applicable only if the rate of interest is fixed. For home loans with a floating rate of interest, the prepayment charges are exempted.
• Lenders may ask for the prepayment of home loan charges on fixed-rate home loans only if the borrower has taken a loan from another bank or a housing finance company to repay the loan amount.
• The rate at which a homebuyer needs to pay the prepayment penalty on a home loan can be decided mutually by both parties at the time of loan disbursal.

Home Loan for Luxury Properties

Home loans are very common financial tools that enable people to buy their dream homes. Further, if someone is planning to buy a premium luxury property, taking a home loan is a more sensible decision because of the entailing tax benefits. This is one of the reasons why property like Piramal Aranya in Byculla is a popular choice for home buyers. This ultra-luxurious residential property offers large open spaces with abundant greenery. It has all the modern amenities a homebuyer would want in their dream abode.

To Conclude

The prepayment of a home loan can help borrowers make substantial savings. It also allows them to reduce their EMI amount or repayment tenure. However, one should conduct a cost-savings comparison to analyse whether it would be profitable to prepay a home loan at a given point in time or not. To know how to pay a home loan early, one can get in touch with the lender’s customer support team.

Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.