A "low interest" loan shouldn't mean you have very little interest in paying it back!
  • Home Loan Preclosure

    Preclosing a home loan simply means paying off your home loan way before the term of the mortgage is done. This can be done for various reasons such as refinancing, saving on interest, etc. Sometimes a borrower can refinance his/her housing loan with another bank merely because the bank is willing to provide a lower rate of interest on the home loan than the bank that the borrower is currently indebted by. In this case, the borrower simply applies for a loan in a desired bank, and upon approval, the bank pays off the existing loan in full, thereby allowing the borrower to avail a loan with a lowered interest rate.

    A borrower can also preclose a housing loan to save up on interest. Closing off a loan before the term is due allows the borrower to evade a part of the interest. Any interest he/she was supposed to pay post preclosure will automatically be waived off on closing the loan. However, one must take into consideration the home loan preclosing charges that a bank may charge before preclosing. Sometimes, it would not make sense to preclose the loan as the charges levied on home loan preclosure exceed the amount that can be saved by paying off the loan in full.

    Banks usually dispirit borrowers to prepay housing loans as the borrower would end up repaying lesser to the bank than if he/she had to finish off the entire tenure of the loan. This is why a bank or lender usually charges a preclosure fee.

    Home loan preclosure fees of banks - 23 Sep 2023

    Bank Preclosure charges Prepayment charges
    PNB Housing Finance Limited Nil Nil - Individual Borrowers
    2% of prepaid principal – Non-individual borrowers
    HDFC LTD. Nil Nil
    Indiabulls Nil Nil
    Sundaram Home Finance Limited Nil Nil
    Axis Bank Nil Nil
    DBS Bank Nil Nil
    Aditya Birla Housing Finance Limited Nil - Individual Borrowers
    2% of outstanding principal – Non-individual borrowers
    Gruh Finance Limited Nil Nil
    Oriental Bank of Commerce Nil Nil
    DHFL Nil - Individual Borrowers
    2% of outstanding principal – Non-individual borrowers
    Nil - Individual Borrowers
    3% of outstanding principal – Non-individual borrowers
    LIC Housing Finance Limited Nil to 2% of the prepaid loan amount Nil to 2% of the prepaid loan amount
    Federal Bank Nil to 3% of the outstanding balance Nil to 3% of the outstanding balance
    State Bank of India Nil Nil
    Andhra Bank Nil Nil
    Dhanlaxmi Bank Nil As per the terms of the bank
    Bank of Baroda Nil Nil
    Bank of India Nil Nil
    Bank of Maharashtra Nil Nil
    Canara Bank Nil Nil
    Dena Bank Nil Nil
    IDBI Bank Nil Nil
    Indian Overseas Bank Nil Nil
    Karur Vysya Bank Nil Nil
    South Indian Bank Nil Nil
    Tamilnad Mercantile Bank Nil Nil
    Central Bank of India Nil Nil
    India Shelter Finance Corporation Nil Nil
    AAVAS Financiers Limited Nil Nil
    Reliance Home Finance Limited 2% to 5% of the poutstanding principal 2% to 5% of the poutstanding principal
    TATA Capital Nil – When paid off using own funds Nil – When paid off using own funds
    Kotak Mahindra Bank Nil Nil
    Jammu & Kashmir Bank Nil Nil
    Yes Bank Nil - For floating rates
    4% of outstanding principal –for fixed rates
    Nil - For floating rates
    4% of outstanding principal –for fixed rates

    3 Easy steps to preclose home loan

    1. Write to the bank, in detail, about the status of your housing loan
    2. Make sure that you are returned all official documents and the bank has provided you with a No Objection Certificate (NOC) claiming that there are no outstanding dues to be paid by you
    3. Another NOC has to be availed by the bank stating that both parties, i.e, the bank and the borrower, has duly agreed to pay off the loan

    Types of home loan closures

    The various types of home loan closures are as follows:

    1. Preclosure - Preclosure, as mentioned earlier, is the closing of the housing loan by paying the entire amount due towards the loan before the intended tenure of the loan.
    2. Regular closure - Regular closure is the closure of a home loan on completion of the tenure. The natural intended course of the loan takes place and the loan is resolved as per the tenure agreed on application of the loan.
    3. Bad loan closure - in few cases, if a borrower is unable to pay off a part of the loan, banks may waive off the fee after careful consideration of the situation. However, in most cases the collateral given to the bank for the loan will be compromised or the guarantor will be questioned, if applicable.
    4. Settled loan closure - Settled loan closure is a situation wherein a borrower is unable to pay off the entire loan amount and therefore, the lender offers the borrower a discounted rate to pay towards the overdue amount of the loan. The remaining amount is then waived off.

    Documents required after closing off a housing loan

    After closure of a home loan, it is the lender’s duty to hand over all the required documents back to the borrower. After all dues have been paid to the bank, the documents mentioned below must be collected from the lending institution.

    • In the event that the loan account holder has expired during the course of the loan, the property documents in the POA (Power of Attorney) format must be collected without fail from the lender.
    • In order to attain the property documents, the legal heir or nominee must write a letter to the bank or financial institution requesting for the same.
    • A letter of abdication relinquishment must be written in order to surrender the property to the legal heir or nominee.

    6 Thing to remember during home loan preclosure

    1. Collecting the documents – While applying for the housing loan, original documents of the property must be handed over to the bank. These documents must be collected back from the bank on closure of the loan.
    2. Collecting the No Objection Certificate – The No Objection Certificate or NOC is a statement by the bank acknowledging that you have paid all your dues.
    3. Update your credit score – Once the loan has been closed, you need to request the bank to update your credit score. This will help you avail loans easily in future.
    4. Don’t forget to carry your government issued identification card. This is of utmost importance in order to close off a loan.
    5. A cheque book must also be kept handy as you may need to pay the final settlement of the housing loan.
    6. An acknowledgement of the payment made towards the loan must be taken from the bank. This must be duly stamped and signed by an authorized bank official.

    Demerits of preclosing a home loan

    • A charge is levied on preclosure. And in the event that the penalty on preclosure exceeds the interest saved on the loan, it becomes irrational to preclose the loan.
    • Preclosing a housing loan means that you lose a big chunk on money in one go. This can be beneficial in saving interest but becomes a burden to an individual as he/she loses out on a lot of money instantly, often damaging the lifestyle of that person.

    In conclusion, prepaying a loan can help save some money. However, it must be done after careful calculation, as sometimes it may very well be that you are not saving any money. Also, the lump sum outflow of money can be a detriment to a person’s lifestyle and daily requirements.

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