You consider a home loan a financial commitment that allows you to fulfill the dream of owning a house. Commonly, the loan tenure varies from 5 years to 30 years. With a limited monthly salary, anyone can learn to manage EMIs. However, the interest rate can rise after an extended period, causing pressure.
After improving your financial situation, you can move out of this EMI circle and house loan burden through home loan prepayment.
Read today’s Brick & Bolt blog to find out how to close the home loan early.
Understanding Home Loan Prepayment
You can understand home loan prepayment as paying off an existing home construction loan, either partially or in full, before its official due date. The complete payment of the outstanding loan amount before the end of the loan tenure is called loan foreclosure.
If you are not interested in paying EMI monthly and wish to get financial freedom sooner and save the interest amount, this will be the best choice. However, you may have to pay prepayment penalties to the respective lenders.
You can make the prepayment in two forms: full repayment and partial prepayment.
In full repayment, you need to pay off the entire loan balance, and in partial prepayment, you can lower your outstanding principal while keeping the loan active.
How to Close the Home Loan Early?
You can choose the following ways to close your home loan early:
Increase EMI Payments
The most common way to close your home loan early is by increasing the Equated Monthly Installments (EMIs). With higher EMIs, you can pay a greater portion of your principal rather than interest. It effectively reduces the total outstanding amount faster. Increasing the EMI can significantly reduce loan tenure and save on interest expenses over time. By using an online EMI calculator for home loans, you can consider different scenarios to understand the extent of your savings when adjusting EMI payments. For manual calculations, you can consider this blog: How to Calculate EMI for Housing Loan
Make Lump-Sum Prepayments
You can also repay a home loan faster by making lump-sum payments. Here, you will use a bonus, savings, tax refund, or inheritance to pay off a significant part of the home loan. Doing this early in the loan period helps the most because interest charges are highest at the beginning. This reduces the total amount you owe and helps you close the loan sooner.
Switch to a Shorter Loan Tenure
You can reduce home loan tenure to repay the loan earlier. It can increase the EMI amount and reduce the total interest paid over the life of the loan. For example, switching from a 20-year tenure to a 15-year tenure can save considerable interest.
Use Balance Transfer to a Lower Interest Rate
If you find another bank that offers a lower interest rate, you can transfer your home loan to save money. The balance transfer can allow a lower interest rate, and your monthly payments (EMIs) become smaller, making it easier to repay the loan faster.
Make Regular Part-Prepayments
Many banks allow you to make 1-4 extra payments each year for free. This helps you pay off your home loan faster. Even small extra payments can reduce the total loan amount, which means you pay less interest over time. By doing this regularly, you can close the loan much sooner.
Things to Check Before Home Loan Foreclosure
When you want to repay the entire amount of the loan along with interest to the lender, you need to consider the following major factors:
Home Loan Foreclosure Charges:
While doing a loan prepayment or foreclosure of a home loan, you need to check the home loan prepayment penalty or foreclosure charges. It will vary from one bank to another, commonly between 0-2% of the outstanding balance for loans closed within the first three to five years. It can give you an idea of how much you may need to pay as fees.
Tax Benefits:
You may have the chance to get advantages from tax benefits associated with home loans under Section 24 (interest payment) and Section 80C (principal repayment) of the Income Tax Act. If you choose the prepayment option, your eligibility for these deductions can be impacted.
CIBIL Score Effect:
Closing a loan can positively influence the CIBIL score by improving the credit mix. Verifying the principal balance remains vital, as this will determine the prepayment costs.
Step-by-Step Process to Close a Home Loan Early
Follow this guide while you are working on home loan foreclosure:
Check Home Loan Account Statement
When you close home loan early, start by reviewing your home loan account statement to determine the outstanding loan amount. Make sure that there are no pending dues, including interest, pre-closure charges, or any other fees.
Inform the Bank & Submit a Foreclosure Request
Send a formal foreclosure request to notify your lender or bank, along with the reason. You generally need to submit a formal foreclosure request and the necessary documents, such as identity proof and loan account details. The bank will check how much you need to pay the total amount due for closure, including any home loan foreclosure charges, and give you the final amount to close the loan.
Pay Remaining Dues
After receiving the closure amount from the bank, make the necessary payment. Always confirm that you have settled all dues, along with any foreclosure charges.
Obtain No Due Certificate (NDC) & Lien Removal
After the payment, request a No Due Certificate (NDC) from your lender. This document acts as proof to confirm that you have paid off your home loan in full and that you don’t have any balance left to pay. Also, visit the registrar’s office to ensure that any lien on the property is removed.
Update Property Records
After closing your home loan, update your property records to show that the loan is fully paid. You need to get a new Encumbrance Certificate (EC), which proves that your property has no pending loans or financial dues.
Why do Lenders Charge a Prepayment Penalty?
Lenders charge prepayment costs to protect their financial interests. Lenders don’t receive the expected interest income when you repay a home loan early, mainly during the initial years. This is quite significant for fixed-rate loans, where the lender has calculated future earnings based on the original loan term. So, lenders charge a prepayment penalty to close the loan.
Common Mistakes to Avoid
Consider the following cases to avoid future mistakes while prepaying your house loans:
In a hurry for loan foreclosure, many people won’t check the prepayment clauses in the loan agreement; it may have included additional fees that you didn’t expect. Hence, consider reading the complete loan agreement before taking the house loan and while foreclosing the loan. It helps to avoid disturbances in your savings plan.
Don’t miss the tax benefits associated with early closure. Remember, tax deductions (under Section 24 and Section 80C) will no longer apply if you foreclose a loan.
Never forget to get a No Due Certificate (NDC) upon completion of the loan. This document is official proof that all dues have been settled, preventing future differences.
When making a home loan prepayment, remember that a prepayment penalty usually applies only if you pay off the entire loan balance. Sometimes, a penalty may also apply if you make a very large payment at once. However, if you pay extra in small amounts, there is usually no penalty. It’s always best to check with your lender to be sure. So, always understand the prepayment rules before taking a home loan. You can consult a financial advisor or a mortgage specialist for more knowledge.
Hemali Patel