Among the different types of loans available in the Indian market, a home loan is one of the most common and is also considered one of the biggest financial undertakings. Most lenders offer a home mortgage loan which comes with a repayment option of up to 30 years. While many borrowers prefer to pay EMIs as planned, some of them are enticed to repay the loan by home loan prepayment Charges.
Additionally, prepayment comes with ending the loan sooner than the contractual agreed-upon date. Unfortunately, prepayment often comes at the cost of incurring additional fees, home loan prepayment charges.
What is Home Loan Prepayment?
It’s no wonder it’s referred as ‘pre-payment’ as it denotes settling a loan in advance before the pre-specified date mutually agreed upon by both parties. In terms of home loans, it can be defined as prepayment of a loan in full or in part in advance of the repayment term in relation to… In other words, there are two methods of executing this:
Partial Prepayment – This entails making a payment of a certain amount higher than the usual payment scheduled on the loan principal.
Full Prepayment (Foreclosure) – Paying off the total outstanding balance of your loan earlier than what was intended during the duration of the loan
Both of these options can reduce interest expenses and decrease the burden from the outstanding loan. However, depending on the type of loan you have and its specific terms, lenders might impose a prepayment penalty.
What are home loan prepayment charges?
These are charges that lenders impose when you make the decision to pay off, in full, your loan before the agreed repayment period expires. It is charged as a set percentage of the original amount being prepaid, which differs based on:
- Nature of the loan availed (fixed or floating rate)
- Category of the borrower (individual or corporate)
- Source of the loan (self funds or balance transfer)
- Prepayment rules set by RBI and NHB
The reserve bank of India and national housing bank have set certain rules regarding the prepayment rules for mortgage loans.
✅ No Charges on Floating Rate Loans
According to guidelines set by RBI, no charges shall be levied in case of prepayment or foreclosure on floating rate loans.
This is applicable irrespective of whether the prepayment is done out of his own funds or by switching from one bank to another.
What is the Purpose of Prepayment Fees?
Lenders rely on interest earnings for profit, and having to prematurely pay off a loan restricts their earning potential. Therefore, they impose an expected future income compensation penalty. These are typically added to fixed rate or corporate loans.
Who is Prepayment Fees Applicable For?
Penalties are available for:
- Individual non-borrowers including: partnerships, companies, or trusts.
- Those with fixed interest home loans, particularly if they refinance through a balance transfer.
- Those who use borrowed funds to settle the loan.
- Anyone who wants to forgo a fully paid fixed-rate loan before predetermined term durations (standard of 6-12 months).
When Prepayment Charges Do Not Apply
Requirement
Falsified the floating interest stipulation, rendering the borrower an individual rotation.
When a borrower makes a prepayment utilizing his/her savings, salary, or bonuses.
During certain holiday promotions or the bank offers.
The Benefits Associated With Pre Paying Your Home Loan
Regardless of the common prepayment penalties, it is without a doubt that a home loan prepayment can be financially beneficial in these ways:
Interest Rate Reduction
Reducing the payable interest burden increases bills by hundreds of thousands throughout the months or years even.
Decrease in Loan Duration
Prepayment allows you to finish your loan earlier than agreed upon which greatly increases your financial flexibility and independence.
Enhanced Financial Management
The money that would have otherwise gone towards paying a loan could be put into better use and investments, retirement savings, or even education expenses.
Higher Credit Ratings
A favorable CIBIL score along with credit worthiness can be achieved with prepayment.
Ways to Avoid or Minimize Prepayment Penalties
Here at Today Finserv Consulitng India, we ensure borrowers come up with an optimal strategy revolving around the prepayment. Below are some strategies to put in place:
Select Floating Interest Rate Loans
Prepayment penalties stroke away with a floating interest rate home loan.
Accessible Funds
Avoid acquiring money from other financial institutions because using your own funds will greatly reduce or the charge all together.
Discuss With The Financial Provider
Some banks in particular are more flexible with the removal of certain fees for loyal customers that tend to borrow a lot of credit.
Set Aside Money Over Time
Attempt making gradual partial prepayments instead of one lump sum. Many banks accept prepayment of up to 25% of the loan amount annually without charging a fee.
Timing Is Everything
Do not make prepayments during the lock-in period which is usually 6-12 months after disbursal, as fees are more likely to apply.
How Today Finserv Assists You With Smart Prepayment?
Today Finserv Consulting India has 30 years of experience in home loan consulting. We offer you:
✅ Detailed repayment planning analysis and loan modeling.
✅ Comparison of prepayment charge by banks.
✅ Help with negotiation of waivers.
✅ Strategies for balance transfer to lower cost of loan.
✅ Scheduling of prepayment according to bonuses or salary cycles.
Conclusion
When strategically timed and well-planned, prepayment of home loans can proved beneficial. Knowing the type of prepayment penalty your loan has and selecting the optimal structure has the potential to save you lakhs in interest payments and help you become debt-free sooner.
We help you from the application stage up until prepayment and closure of the loan at Today Finserv Consulting India. We guide you through the myriad of options with expert advice, lender comparison, and tailored strategies aimed at ensuring you get the best deal possible.
