Home loan foreclosure enables you to pay off home loans well before the scheduled tenure. It allows borrowers to settle the outstanding loan amount in a lump sum, effectively concluding their home loan obligations ahead of time.

Given that home loan repayment typically spans a long duration, circumstances may arise where a borrower’s financial situation improves, making it feasible to clear the loan in one go. Home loan foreclosure offers two significant advantages: it reduces interest payments and ensures a surplus of monthly cash flow. Here’s a quick guide for those considering home loan foreclosure:

No Foreclosure Fees

According to RBI regulations, borrowers with floating interest rate home loans are not subject to foreclosure fees. If your home loan has a variable interest rate, you won’t be charged any penalties for closing the loan prematurely. However, if your loan has a fixed interest rate, banks may impose a 4-5% foreclosure fee. Fortunately, most home loans today have floating interest rates, reducing the likelihood of foreclosure fees.

Also Read: How does a monthly reducing loan help a home loan borrower?

Inform the Bank

Although not mandatory, it is advisable to formally inform your bank about your decision to foreclose your home loan at least a week or two in advance. Providing a written notice or sending an email to the branch’s official email address can help prevent last-minute issues caused by human errors.

Obtain NOC and Encumbrance Certificate

Foreclosing home loan borrowers should obtain a non-objection certificate (NOC) from their lender. This certificate serves as insurance against future claims of non-repayment by the bank. Additionally, after completing the foreclosure process, request an Encumbrance Certificate (EC), which outlines all financial transactions related to your property. The EC confirms that your property (house) has no monetary or legal liabilities, which can be invaluable when selling your house in the future.

Adhil Shetty, CEO, Bankbazaar.com, says, “After foreclosure, borrowers receive a No Objection Certificate (NOC) from the lender, confirming the closure of the loan account. This NOC is important for legal and financial purposes, especially when selling the property in the future. Home loan foreclosure offers borrowers the flexibility to reduce their debt burden and save on interest costs, provided the applicable terms and conditions are met.”

Remove Lien

If there is a lien on your property, which prevents you from selling it, ensure it is removed during the home loan foreclosure process. This process may take a couple of weeks but guarantees your right to sell your property without legal complications after clearing your debt to the lender.

Retrieve Original Documents and Post-Dated Cheques

As you settle your home loan through foreclosure, ensure that all documents are returned to you by the bank. This includes post-dated cheques, property documents submitted during the loan application, and any other originals. Collecting these documents will help avoid conflicts in the future.

Home loan foreclosure can be a wise decision if you have the financial means to clear the outstanding amount. It can enhance your credit score and overall creditworthiness. However, if this decision strains your current finances and investments, it may not be advisable.

Additionally, in the final years of your home loan tenure, consider calculating the minimal interest savings, as foreclosure may not be economically viable. Instead, you may continue with repayments and invest your available funds for potentially higher returns.