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How to Prepay a Home Loan?

The home loan prepayment process involves paying off the remaining loan amount and the interest accrued on the loan till the date of repayment. Home loan prepayment helps the borrower save the interest that must be paid to the lender and develop a good credit profile for future borrowing instances.

Home loan prepayment usually includes foreclosure charges. Foreclosure charges are the amount that is paid to the lending institution, in addition to the remaining principal amount and the interest to date. Foreclosure charges may range from two per cent to five per cent depending upon the bank. However, Bajaj Housing Finance charges no foreclosure or part-prepayment charges on a borrower’s decision to foreclose their home loan.

There are two kinds of prepayments that are accepted by lending institutions.

Partial prepayment

Partial prepayments only pay off a part of the home loan and not the loan in totality. It is not unusual for lending institutions to accept amounts equivalent to 3 Equated Monthly Instalments (EMIs) as partial prepayment. However, the borrower is free to increase the amount paid as prepayment if they so desire. Many advise borrowers to do this whenever they have a cash surplus, so they can reduce their EMI load, and can save more on their home loan.

Complete Prepayment

Banks and lending institutions usually allow the borrower to make a total prepayment of the remaining loan amount, after paying at least six EMIs of the loans. Complete prepayment leads to the transfer of the said property in the name(s) of the borrower(s) and relieves the borrower(s) from any financial or legal liability vis-à-vis the home loan, before the end of their official repayment tenor.

Home loan prepayment rules may vary from lender to lender. The borrower should understand in detail the rules for foreclosure of the home loan. To make it easier for the borrower, Online Home Loan Prepayment Calculators are easily available and help in calculating the total cost payable, should the borrower choose to prepay the loan. The variables of the loan, such as the amount borrowed, the total number of EMIs -- paid and unpaid, rate of interest of the home loan and the tenor of the home loans are entered into the home loan prepayment calculator which then computes the cost of foreclosure. These calculations are better done through the calculator to avoid mistakes that may crop up when done manually.

The actual cost of foreclosure is slightly more than that calculated by the prepayment calculator. This is because the legal costs of regulatory agencies and statutory bodies are usually not accounted for in the foreclosure calculation and need to be paid by the borrower. These costs also vary from state to state and amongst union territories, but lenders like Bajaj Housing Finance don’t levy any additional costs on foreclosure or even part-prepayment.

The home loan prepayment process is rather simple. The borrower needs to make an in-person application to the lender, and obtain a written estimate of foreclosure costs. This is followed by the submission of the loan documents to the lending institution. Home Loan documents include the loan agreement, the no dues and no-objection certificates (NOC/NDC) and the payment receipt of the last EMI payment made. 

This is followed by the actual payment which is made to repay the loan. The payment shouldn't be made in cash, but rather in the form of a cheque or an electronic payment. This allows a trail of the financial transaction to be recorded in case any discrepancies occur later. Such an electronic trail protects the interest of both the borrower and the lender.

After the payment is made the lending institution should immediately provide a receipt of the payment. After processing the foreclosure paperwork, the lending institution should provide the borrower with a loan closure certificate, a final receipt of the amount paid and no financial or legal liability certificate. These documents should be retained by the borrower to prove that he/she has paid off the home loan in totality.

Another important administrative task is informing the crediting agencies about the prepayment of the loan. Prepayment signifies acceptably good repayment capacity and helps the borrower develop a good credit history. This helps the borrower obtain further loans if needed.