Holding a debt is an unwanted and distressing thought for many individuals. Any loan taken is a form of debt which needs to be repaid with the addition of interest that is applicable on that loan. Considering this, it is only natural that anyone who holds a home loan, would want to pay it off as soon as their finances have improved. Loan prepayment is defined as when a customer has paid off their loan completely or partially before the scheduled due date as specified in the policy wording. However, prepayment on a home loan, though considered by many loan takers, may not always be the best financial decision that one can make. There are multiple factors which one must consider before deciding to pre-close their home loan.
While a prepayment on your home loan can be beneficial for you, it is a loss for your home loan provider. For home loans, banks borrow funds based on a commitment for a long time period. When a customer pre-closes their home loan, those funds received by the bank must be re-assigned through credit channels, which is an additional cost for the bank to bear. This is the reason why loan borrowers are discouraged from prepaying their loan by the bank. One of the most common method in which banks discourage prepayment on home loans is be refusing to accept the payment unless the borrower visits the bank branch in person. However, though most people may not be aware of the fact that even if they may not be physically present at the bank branch to make the prepayment, they can do so by authorizing a representative to make the payment of their behalf. For this purpose, the representative must carry a letter issued by the original loan borrower authorizing them to make the payment on their (the loan borrower’s) behalf.
Given below are a few things to remember when you are making your home loan prepayment:
One of the most important parts of the prepayment process is updating your prepayment details in the CIBIL database. Your CIBIL score is essentially a proof of your credit health and is heavily dependent on your outstanding home loan balance. Therefore, making a prepayment on your home loan can greatly decrease your outstanding balance and improve your credit score.
While banks may be quick to update your CIBIL score hen you’ve take the loan, they may not be as efficient to update the score when you have pre-paid your loan. You must ask your bank to immediately update your current home loan account balance in the CIBIL database with the revised principal balance amount. It can normally take from 45 to 60 days for the details to be updated, counting from the date when the prepayment has been made. Do remember to go through your CIBIL report after the mentioned duration required for updating the score on the database and check if the same has been done.
Following the Reserve Bank of India’s tightened policy stance, the present interest rate cycle is likely to either incline or remain steady. But is it wise to foreclose your home loans early with rates expected to go up again during the fiscal year? With most home loans linked to the Marginal Cost of funds based Lending Rate (MCLR), existing borrowers can continue paying the same rate until the reset clause is specified by the bank depending on the type of MCLR the loan is linked to. While new borrowers will have to pay a higher interest on the home loans, existing borrowers might have to brace for a higher rate if the bank hasn’t specified the rest clause in the previous months. Another aspect to consider before foreclosing your home loan are the tax benefits one can avail on the repayment of principal and interest amount annually. As per the Income Tax Act, you can avail benefits that allow deductions up to Rs.1,5 lakh under Section 80C on the principal part and deductions up to Rs.2 lakh under Section 24(b) for the interest payment on the housing loan.