Pre-payment or foreclosure of home loans enables borrowers to repay their loans partially or fully before the completion of the loan tenure. When deciding to pay off a loan ahead of schedule, the pre-paying of loan brings down the outstanding principal, therefore reducing the interest payable and the loan tenure. Partially pre-paying a loan also lowers the borrower’s EMI outgo. Usually, most banks offer pre-payment and foreclosure facilities for loan borrowers, with an additional charge.
Having said that, not all loan borrowers have to pay the pre-payment charges. Banks/lenders charge around 2 per cent of the prepayment amount as pre-payment charges for borrowers with fixed interest rate loans. Floating interest rate home loans taken by borrowers are exempted from prepayment charges. If prepayments are made through borrowed funds, then pre-payment charges are added. However, if prepayments are made through non-borrowed funds (borrower’s own funds), then no prepayment penalty is levied on the borrower.
Note that, most lenders do not encourage prepayment of loans as it causes a loss to them. Hence, banks impose pre-payment charges for preclosing a home loan. Even though all home loan borrowers are eligible for pre-closure, the borrower can opt for it only if the lender offers this facility. It is better to check with the lender about the pre-payment terms applicable, at the time of opting for the loan.
Here is how home loan borrowers can systematically pre-pay their home loan:
There are various ways to prepay a home loan. Borrowers can either go for full repayment and completely repay the loan ahead of schedule or can pay off a part of their debt. A borrower can otherwise choose a combination of the two.
- Borrowers can start small, and gradually go up. It is one way of prepaying a home loan, starting with repaying a small prepayment amount at the beginning of the loan and increasing the amount every year at a constant rate. Experts say borrowers can do so by saving through the year and then using the savings on loan prepayment.
- Borrowers can also repay a fixed prepayment amount towards the principal every year. This payment has to be over and above the EMI payments. For these borrowers can plan their expenses through the year and make a fixed saving every year. Then they can spend the saving on prepayment to reduce principal.
- Another ideal way of reducing the principal amount of the home loan is by paying more than the calculated EMI. The borrower can make a slightly higher payment than their EMI every month. This way there is a reduction in the borrower’s debt burden.
- Additionally, borrowers can also make full repayment. Experts say borrowers can do so if their finances have improved tremendously or they have been able to mobilize a large sum of money. Even though completely pay off a home loan ahead of the tenure reduces the debt burden, that borrower might have to pay a fine for full prepayment of the home loan.