Home Loan Prepayment, Charges & Guidelines

Repaying a home loan is a big financial commitment and prepaying the loan can help you become debt-free faster and make the best use of the surplus money you have. Most financial institutes allow borrowers to make prepayments; however, before you do so, get acquainted with the home loan prepayment process and, more importantly, the home loan prepayment rules. You can then reduce your debt burden strategically.

Here is more on home loan prepayments.

What is Prepayment of Home Loan?

Home loan prepayment is a facility by which you can pay your loan, fully or partially, ahead of time. This means that you pay a portion of the principal, over and above your EMI, before it is due to be paid. Since the outstanding loan amount reduces when you make a part-prepayment, you save on interest, either via an EMI reduction or a tenor reduction.

Who is Eligible for a Home Loan Prepayment?

If your lender offers the facility of a home loan prepayment and you are a home loan borrower, you will be eligible to prepay your loan. However, some lenders allow only a certain amount of prepayments a year, after a certain lock-in period, and only if your prepayment is 3 times larger than your EMI or some other minimum amount. Knowing these home loan prepayment rules before you sign up for a home loan is helpful as it allows you to choose a lender with relaxed criteria and plan in advance.

What are home loan prepayment charges?

Prepayment charges are a fee you incur for paying your dues early. When finance companies levy this kind of charge, it is to protect them from the financial loss resulting from the lower interest income. At the time of prepayment, lenders normally charge a 2-4% fee on the outstanding principal amount or on the part-prepayment amount.

Home Loan Prepayment RBI Guidelines

The Reserve Bank of India (RBI) sets rules for part-prepayment and foreclosures (full prepayment) of home loans. As per RBI guidelines pertaining to floating-rate loans:

Banks and NBFCs “shall not charge foreclosure charges/ prepayment penalties on any floating rate term loan sanctioned, for purposes other than business, to individual borrowers with or without co-obligant(s).”

[Refer to RBI/2019-20/29 DBR.Dir.BC.No.08/13.03.00/2019-20 and RBI/2019-20/30 DNBR (PD) CC.No.101/03.10.001/2019-20]

However, as per your loan agreement prepayment and foreclosure charges may apply if the home loan is taken:

• On a fixed-rate basis
• By a non-individual

How to Use the Home Loan Prepayment Calculator?

When making a prepayment, it is important to know your interest savings, either in terms of reduced EMIs or a reduced tenor. You can then weigh this against the prepayment charges and/or any opportunity cost, such as that associated with using the surplus money for an investment.

The Home Loan Part Prepayment Calculator is a tool you can use to easily view your interest savings. All you need to do is to view your revised EMI and tenor is enter values for the:

• Loan amount
• Tenor
• Rate of interest
• Part-prepayment amount

You can use the sliders as well and once you fill in the values, you will be able to see:

• Revised EMI
• EMI savings per month
• EMI saved in %
• Revised Tenor

When planning your prepayment, remember that the earlier you make a prepayment, the more interest you will save.

Now that you know more about the home loan prepayment rules and process, proceed to strategically reduce your debt!