What are the Charges Applicable on Home Loan Prepayment?

If you are repaying a home loan and are thinking about making prepayments to close the home loan account faster than the agreed upon tenure, then you should be aware of the home loan pre closure charges.

Home loans are usually known for their long repayment tenures, which can be as long as 20-30 years. And, during the tenure, the borrower needs to regularly pay the interest cost on the outstanding loan amount. But, one can save on the interest costs by prepaying the loan amount in part or full, meaning, repaying the loan amount before the completion of the loan tenure.

However, before making the prepayment, you should check the norms and prepayment charges with the lender related to the home loan prepayment.

Home Loan Prepayment in Detail

Prepaying a home loan is one of the popular loan repayment strategies used by borrowers to reduce interest costs and loan tenure. However, the rules related to the prepayment of a home loan differs depending on the interest structure & purpose of loan as well as the lender’s policy.

For instance, if you choose to prepay a home loan taken at a fixed interest rate or for business purposes, you may be required to pay the applicable prepayment charges on the home loan, depending on the lender’s policy. The charges are levied to recover the loss of interest income due to the early repayment of the loan.

Also, in case, the home loan is refinanced with another lender, your existing lender may charge a certain percentage (usually 2-3%) of the outstanding loan amount as a prepayment penalty to issue a No-objection Certificate (NoC).

Therefore, before making any prepayment against your outstanding home loan amount, check the loan document and confirm with the lender about the process.

Home Loan Prepayment Charges

The pre closure charges for home loan charges (if applicable) differ for every lender. Usually, home loan prepayment charges are levied on home loans taken at a fixed interest rate, which ranges between 2-3% of the prepaid amount, plus the service charges (GST).

In the case of a home loan with a floating interest rate, most lenders don’t charge any prepayment charges and the borrowers are exempted from, especially if the loan was taken for non-business purposes. If one is going for refinancing of the home loan, the lender may charge a sum for issuing a No-objection certificate (NOC).

Important Points to Keep in Mind When Prepaying Home Loan

Choose a product that doesn’t charge any prepayment penalty: Prepaying a home loan is a rewarding experience, and it is especially useful for borrowers whose income increases over the years in lieu of increment at work, bonuses, extra income sources from renting out property, etc. Select a home loan at a floating interest rate to benefit from the easy prepayment policy.

Make sure that prepayments are reflected in CIBIL report: Ask your lender to report the prepayments to the CIBIL database. It results in a positive impact on your credit score and improves your creditworthiness.

Weigh your prepayment benefits: Making prepayments reduces your chances of availing tax benefits on interest and principal components. Therefore, you should ensure that your total prepayment benefits should be greater than your total taxation benefits and any applicable charges.

Conclusion

To be debt-free is very important to become financially stable and focus better on long-term goals. However, to achieve a debt-free status, you should not make any ill-timed or bad financial decisions that impact your current financial stability and creditworthiness.

Before making a home loan prepayment, you should consider the impact on your finances and net interest cost savings. Use the home loan prepayment calculator to plan your prepayments. It would also be strongly advisable to plan out your future expenses such as children’s school fees, home renovations, etc. so that you can be sure that you will not regret any amount paid towards prepayment of your home loan.

You can also consider stepping up your EMIs based on your increase in salary rather than making lump-sum payments. Opting for a higher EMI amount reduces loan tenure and you may become eligible for a higher home loan amount.