Things To Know While Prepaying A Home Loan
Prepayment penalty, a nightmare suffered often by individual borrowers of home loans, is set to end. Prepayment of a loan means payment of all debts before the due date. Prepayment penalty is an amount charged by banks if a borrower wants to prepay their loan. Prepayment penalty in some banks can range between one and five per cent on the loan due, depending on the nature of the loan. The removal of prepayment penalty will make it easier for customers to shift loans to other banks if they get a better interest rate. Also, it will increase competition among banks.
Ban on levy of prepayment charges
Recently, National Housing Bank (NHB) directed housing finance companies (HFCs) not to levy prepayment charges. NHB has also advised the HFCs to ensure that both new customer and existing customers pay the same interest rate.
The Reserve Bank of India has welcomed NHB’s ban on prepayment charges, and as a part of its move to introduce customer-friendly norms, has proposed to notify banning prepayment penalty. This ban is only on prepayment of floating rate home loans and borrowers of fixed rate home loans will have to pay from their own sources to avoid prepayment penalties.
Tips to avoid prepayment penalty
- Negotiate with your Bank: Before switching home loan, let your bank know why you planning to pre-pay your home loan. If the interest rate is too high or you Home Loan EMI are unaffordable to you, the bank might give you options such as partial repayment, extension in tenure, relaxation in Home Loan EMI etc.
- Switch to floating rate from fixed rate loan: Some Banks let their borrower choose to shift to a floating rate of home loan, if the fixed rate home loan is not affordable. Floating rate home loans is 1 to 2 per cent cheaper than fixed interest rates.
- Partial prepayment: If you are planning to pre-pay your home loan because of high interest rate, you can talk to your bank for partial prepayment and reduce the principal amount, interest and also the outstanding loan amount. Banks allows partial prepayment of home loan not exceed 25% of the loan amount.
- Prepayment of home loan from own source: In case of full prepayment or foreclosure with own funds, there will be no prepayment penalty. Funds can be maturity of life policies, bonus from employment or sale of assets etc.
Home Loan is one of the important sources of fund for your property buying. The interest rate or Home Loan EMI varies from one bank to another. Therefore, while choosing a home loan, EMI or interest rate you need to do careful planning for easy and smooth home loan repayment.
Image: posterize / FreeDigitalPhotos.net
Image: nokhoog_buchachon / FreeDigitalPhotos.net
