Prepayment of Loan
Before reaching any conclusion, First, we need to understand what is meant by prepayment of a loan?
Generally, Prepayment of loan means paying back principal amount of loan before fixed loan tenure. Everyone averse to being debt-ridden. A loan is a debt, that one literally wants to pay as soon as possible.
Prepayment of Home Loan
As we already know that, Average Tenure of Homes loan is 10 to 15 years. Prepaying of Home loan is financially beneficial for home loan Borrowers. It helps to reduce the interest and overall cost of the property. One can prepay Home Loan when get any bonus or on maturity of any investment.
Loan Prepayment Charges
If one decides to repay a loan before the maturity period, Lender will collect charges or fees from the borrower. Lenders charge fees on prepayment of loans because loans are designed to last for a longer period and earn interest for the bank . If one decide to close the loan before that certain time period, the bank may have to bear a loss especially if the loan is a fixed rate loan. Banks charge prepayment penalty to safeguard themselves from any potential loss in a situation of loan prepayment during the loan tenure and also, to deter a customer from transferring their loan to another bank.
Home Loan Prepayment Rules RBI, in its circular “Levy of foreclosure charges/ prepayment penalty on Floating Rate Loans”, released in 2014, issued the following prepayment rules for banks. NHB has come out with similar home loan prepayment rules for Housing Finance Companies.
Banks and HFCs are not allowed to charge prepayment fees in the following cases:
1. Floating Rate Home Loan taken by individuals:
As per the guidelines, Banks and HFCs are not allowed to charge prepayment charges on floating rate home loans taken by individuals, either on part prepayment or full prepayment.
2. Fixed Rate Home Loan from HFCs, provided the prepayment is from own sources:
HFCs are not allowed to charge a prepayment penalty on fixed-rate home loan taken by individuals if the borrower makes the repayment from his own sources.
3. Dual Rate Home Loan from Banks or HFCs:
If the prepayment is done when the loan has shifted to a variable rate scheme and has become a floating rate loan.
However, the banks and HFCs can levy prepayment fees in the following cases:
1. Home Loan taken by non-individuals:
Loan taken by non-individuals such as company, firm etc, are not exempt from foreclosure charges or prepayment penalties, irrespective of whether the home loan is a floating rate loan, fixed rate loan or a dual rate loan.
2. Fixed Rate Home Loans taken from banks:
Banks are allowed to charge a prepayment penalty on fixed rate home loans. The penalty charge will be as per signed loan agreement between the bank and the borrower at the time of loan sanction.
3. Fixed Rate Home Loans taken from HFCs:
HFCs are allowed to charge a prepayment penalty on fixed rate home loans, only if the borrower is repaying the loan by borrowing from another bank or HFC. The HFC cannot charge any prepayment fees, if the borrower repays the loan from his own sources.
4. Dual Rate Home Loans by individuals:
Dual Rate Home Loan Schemes are special schemes in which the interest rate on the loan is fixed for the first few years and then becomes variable. In dual rate schemes, banks are allowed to charge the prepayment penalty if the loan is repaid during the period when it is a fixed rate loan. However, once the loan becomes a floating rate loan, the banks are not allowed to charge any prepayment penalty.
Prepaying of Home Loan is a Good Idea or bad is only depend on Borrower, As they need to ask a question from themselves, are they paying an interest on the home loan that is too high?
If they find their answer to be YES, then it is definitely a good Idea.
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