Home Loan Prepayment: Fees and Guidelines as per RBI

Paying down your loan before its term ends is known as preclosing a mortgage. There are several reasons to do so, such as interest savings and refinancing. If a different bank is prepared to give a better interest rate on a house loan, a borrower may also choose to refinance their housing loan with them. Here, the borrower applies for a loan at a bank of their choice, and if the application is accepted, the bank pays off the previous loan in full, enabling the borrower to obtain a new loan at a lower interest rate.

Another option for a debtor to reduce interest costs is to prepay a home loan. The borrower can save some interest by closing a mortgage before the end of the term. When the loan is closed, whatever interest they were required to pay after the pre-closure will be eliminated.

How to Prepay a Home Loan

You must abide by the various home loan prepayment guidelines and home loan pre-closure charges set out by each bank. However, the fundamental phases of the procedure stay the same.

1. Compose a thorough letter explaining the state of your house loan to your bank.
2. Make sure you receive the required documentation and that the bank issues you with a No Objection Certificate (NOC) attesting to the fact that you owe them nothing.
3. The bank has to get another NOC stating that the borrower and the bank have agreed on the terms of the home loan prepayment.

Read More: Home Loan Disbursement Process In 2024

Home Loan Pre-Closure Charges

You have to pay fines if you pay your payments ahead of time. This kind of levy is used by banking institutions as a safeguard against potential losses resulting from declining interest revenue. When a loan is prepaid, lenders usually charge a fee of two to four percent of the outstanding principle. You may always check the bank's mobile banking app for charges that are exclusive to them.

Home Loan Prepayment Calculator

You may calculate the amount of interest you will have to pay after you have prepaid a portion of your outstanding principle balance with the use of a home loan part-prepayment calculator. You must also account for any applicable loan processing fees when calculating the amount.

This is a quick rundown of the precise functions of this tool. To illustrate and elaborate, let's say the following statistics are assumed as an example:

To utilise a home loan partial repayment calculator, you must ascertain the following factors:

1. The principal amount
2. Total amount you wish to pay in advance
3. The actual tenure of the repayment schedule
4. The applicable loan interest rate

Once you understand the aforementioned factors, you must enter the information into the online calculator to find out how much you will ultimately have to pay in interest after the prepayment.

Things To Keep in Mind While Prepaying A Home Loan

When choosing to pay back your house loan, keep the following in mind:

1. Original property paperwork is required by the bank when you apply for a house loan. Once the loan has been settled, these papers need to be given back to the owner of the property.
2. The bank certifies that you have paid off all of your outstanding obligations with the No Objection Certificate (NOC). Don't forget to gather it to prevent issues later on.
3. Ask the bank to update your credit score after the loan has closed. It will facilitate future loan applications for you.
4. Don't forget to carry your official government identity card. When it comes to loan prepayment, it is crucial.
5. Be ready to make the final settlement payment on your home loan.
6. A confirmation of the loan payment made must be provided by the bank. This document has to be signed and stamped by an approved bank officer.

Read More: 7 Benefits Of Taking Home Loan In 2024

Home Loan Prepayment Penalty

Banks and non-banking financial institutions (NBFCs) that provide house loan prepayment are few in number. This is because you will ultimately pay back the bank or NBFC less when you pay back your house loan. Lenders even impose a prepayment penalty in some situations. For house loans obtained at fixed interest rates, there is typically a prepayment penalty. The purpose of this penalty is to make up for the house loan's interest loss. The amount of this penalty varies based on the conditions of your loan arrangement, however, it can range from 0.5% to 3% of the whole loan amount. However, as was already indicated, prepayment penalties do not apply to loans with adjustable rates.

1. When Banks Cannot Levy a Prepayment Penalty

• Under the following conditions, banks are not allowed to impose prepayment penalties: Prepayment penalties shouldn't be applied to house loans with variable interest rates.
• Lenders are prohibited from assessing prepayment penalties when you use your own income to begin repaying a house loan early.
• There are no prepayment penalties if you choose to convert your home loan from a fixed interest rate to a variable interest rate.

2. When Banks Are Allowed to Charge Prepayment Penalty

• The following conditions may result in a prepayment penalty being assessed by banks:
• Prepayment penalties may apply to home loans with fixed interest rates.
• Prepayment penalties apply if you obtain your home loan from "non-individuals," such as a co-borrower or a third party, such as a business or corporation.

RBI Guidelines For Prepayment of Home Loan

To protect the interests of the borrowers, the Reserve Bank of India (RBI) and the National Housing Bank (NHB) have established a set of norms regarding home loan prepayment. They can pay back their housing loans as cheaply and efficiently as possible according to the instructions. The NHB regulations are designed specifically for housing finance companies, whereas the RBI regulations mostly apply to banks.

No matter what sort of interest rate is used, corporations or corporate organisations that apply for home loans will be responsible for paying foreclosure costs. The house loan agreement will often include a reference to these numbers, which are typically stated as percentages.

A prepayment penalty will be assessed to borrowers of fixed-rate home loans, as specified in the mutually agreed upon agreement. However, if you have a floating-rate house loan, you are not responsible for these types of costs.

Prepayment penalties on fixed-rate house loans only apply if you are repaying the loan with the assistance of a second loan from a different bank or Housing Finance Company (HFC). However, you are not subject to any prepayment penalties if you pay for the item out of pocket.

Individuals who take out dual-rate home loans may be subject to prepayment penalties when the loan has a fixed interest rate. Lenders are prohibited from imposing any kind of prepayment penalty after the home loan converts to a variable rate of interest.

FAQs

Q1. When and how much advance payment should I make?

A. The first few months of credit are the best time to return a loan early. This contributes to minimising interest payments. As a result, it may result in more savings when a loan is paid off early.

Q2. Do all banks permit early repayment of a house loan?

A. If you haven't signed any paperwork prohibiting it, then yes, all banks accept early repayment of your house loan. Prepayment penalties, however, differ significantly between banks. Therefore, you ought to review them before moving on.

Q3. Is it a sensible decision to pay off your house quickly?

A. A house loan, or any other type of loan, should always be returned whenever possible since doing so will eventually relieve you of some of the credit obligations.

The Conclusion

Refinancing your home loan is now simpler according to new RBI housing loan regulations. You may easily choose to transfer lenders for a better repayment plan if you have an ongoing home loan and would like to do so.

Additionally, you can file for a zero-fee foreclosure home loan transfer for the remaining principal amount. But only loans with fluctuating interest rates are covered by this legislation; fixed interest rate loans are not.