Avoid Prepayment Penalty On Your Home Loan

The RBI has shown its displeasure in past on prepayment charges and has been advising the banks against it. The prepayment penalty for public sector banks is about 1% or less, while it can be anywhere between 1% and 3% in private banks. According to source, banks do not charge any prepayment penalty if you prepay using your own sources.

Prepayment implies closing the loan earlier than planned. For a financial institution, a prepayment results in the loss of interest income and therefore prepayment charges are sometimes applicable. Prepayment penalties can be negotiated if you have a good credit history. The penalty is calculated on principal and the prepayment penalty for public sector banks is about 1% or less while it can be anywhere between 1% and 3% in private banks.

Prove the source of fund

Borrowers who seek to pre-close their home loans are now being asked to give evidence of their source of funds. Most lenders levy prepayment penalty only if a home loan borrower is pre-closing the loan with borrowed money. According to financial planners, the easiest way to prove that the fund belongs to you is a bank account statement. If you fail to prove the origin of the fund, you should insist the lender for a one-on-one discussion.

Things to remember for prepaying your home loan

• Before prepaying any loan, make sure you have enough funds left aside to meet any emergency needs that might arise.

• If you have more than one loan, prepay the high interest rate loan first.

• Prepayment penalty charge depends upon your negotiating ability.

• Prepayment penalty charges levied only if a home loan borrower is pre-closing the loan with borrowed money or switching the home loan. There would be no prepayment penalties, if prepayment made by own fund.

• Easiest way to prove that the fund belongs to you is a bank account statement

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• Prepayment penalties can be negotiated if you have a good credit history.

• The penalty is calculated on principal. Higher outstanding principal, interest rate will also be higher for your home loan.

• Understand what fees you might have to pay, and negotiate where possible to bring these down.

• Look for lenders who do not charge prepayment penalty or discuss the clauses at the time of borrowing. Insist on getting a written note on all the clauses.

• You have to furnish proof to the bank that the funds are your own.

• Switching lenders will attract a prepayment penalty from existing lender and processing fee from prospective lender.