Home Loan Preclosure
Preclosing a home loan simply means fully repaying your home loan before the completion of its tenure. This is often done for reasons like refinancing, reducing the overall interest burden, or achieving financial flexibility.
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 scenario, the borrower applies for a loan with their chosen bank, and upon approval, the new bank settles the outstanding loan in full, enabling the borrower to secure a loan at a reduced 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.
Points to consider when pre-closing a home loan:
Make a note of the below-listed points when considering pre-closure of home loan:
1. Pre-payment lock-in period: Most of the lenders do not allow to close the loan within first few months of the pre-payment period. Depending on the loan agreement and the lender, there can be a lock-in period for pre-closure facility.
2. Prepayment Charges: You need to know if your lender imposes any penalties or charges for prepaying or pre-closing the loan. This is common with fixed-rate loans.
3. Outstanding Balance: Confirm the exact outstanding loan amount, including interest, before initiating pre-closure.
4. Savings on Interest: Calculate how much interest you’ll save by pre-closing the loan versus the cost of prepayment charges.
5. Impact on Finances: Make sure that pre-closing the loan doesn’t strain your finances or deplete your emergency savings.
6. Documentation: You need to get a “No Objection Certificate” (NOC) and ensure the lender updates the credit bureau to reflect loan closure.
7. Tax Benefits: Understand how pre-closure may affect your tax benefits on home loan principal and interest under Sections 80C and 24(b) of the Income Tax Act.
8. Credit Score Impact: A closed loan may improve your credit profile, but ensure the closure is properly recorded to avoid errors on your credit report.
9. Alternative Investment: Consider whether the funds used for pre-closure could yield better returns if invested elsewhere.
Reasons why banks charge a home loan pre-closure fee:
Banks usually dispirit borrowers to prepay housing loans as the borrower would end up repaying less to the bank than if he/she had to finish off the entire tenure of the loan.
Besides, banks also incur operational costs while processing the loan and pre-closing a loan can reduce their expected return on investment, which is why, a pre-closure fee is charged.
Home loan preclosure fees of banks
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 | Nil |
Gruh Finance Limited | Nil | Nil |
Oriental Bank of Commerce | Nil | Nil |
DHFL | Nil - 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
- Write to the bank, in detail, about the status of your housing loan
- 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
- 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:
- 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.
- 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.
- 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.
- 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 Things to Remember When Preclosing a Home Loan
- 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.
- 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.
- 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.
- Don't forget to carry your government issued identification card. This is of utmost importance in order to close off a loan.
- A cheque book must also be kept handy as you may need to pay the final settlement of the housing loan.
- 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.
FAQs on Home Loan Preclosure
- Can preclosure terms be negotiated with the lender?
Yes, preclosure terms can be negotiated with the lender.
- What documents will need to be submitted to complete the home loan preclosure process?
Request letter, proof of address, and proof of identity will need to be submitted to complete the home loan preclosure process.
- In case I preclose the home loan, will my credit score be affected?
Yes, your credit score may increase if you preclose the home loan.
- Do lenders allow part payments on home loans?
Yes, most lenders allow part payments on home loans.
- What are the advantages of preclosing a home loan?
Saving on interest and improving the credit score are some of the advantages of preclosing a home loan.
- Will lenders levy a penalty in case I preclose the home loan?
Yes, certain lenders may levy a penalty in case you preclose the home loan.
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