The Do’s and Don’ts of Foreclosing a Home Loan

A recent survey showed that almost 70% of Indians rely on a Home Loan to fund the purchase of their dream home. Home Loans are convenient - you can borrow a huge sum and pay it off comfortably in the form of small EMIs. Though Home Loans are a comfortable, secure and convenient way of building a home or an appreciating asset, not everyone feels comfortable with carrying the burden of a loan. Further, the longer the tenor of a loan, the higher the total interest paid out. Thus, most borrowers try their best to prepay or foreclose their loan before the stipulated period. 

Foreclosure is the process of prepaying a loan or closing it before the stipulated period by making a lump sum payment. Until a few years ago, lenders charge borrowers a hefty fee for preparing or foreclosing their loans. However, as per the new RBI mandate, individual borrowers on floating interest rates can foreclose their loan at no additional cost at any time. So, should borrowers foreclose their loans? 

The answer depends on several things. If you are someone who cannot carry the mental burden of a loan and having debt gives you sleepless nights, you should foreclose your loan if you have the money. However, if loans do not burden you, you must assess whether the interest you will save by preparing the loan is substantial enough to cover up the money you will save by way of tax exemptions provided on Home Loans. 

Under Section 80C of the Income Tax Act, one can claim tax deductions up to a maximum of Rs. 1.5 Lakh on payments made towards principal repayment and up to a maximum of Rs.2 Lakh on payments made toward interest repayment under section 24B of the same act. Over and above this, other sections allow borrowers to save even more money each year by way of Home Loan tax deductions. All in all, an individual can claim up to Rs.5 Lakh as an exemption while repaying a Home Loan. This is a huge amount of money - if the money you will save by foreclosing the loan is enough to cover the money you will lose in the form of taxes, foreclosing the loan would make sense. 

Also Read: Factors You Need to Consider Before Foreclosing Your Home Loan

If you have decided to foreclose or prepay your Home Loan, there are a few things you must keep in mind. Let us look at the dos and don'ts of Home Loan foreclosure.

Home Loan Foreclosure Do’s

If you have decided to foreclose a loan, here are a few things that you must do. 

Talk to Your Lender About Foreclosure Charges

As per the latest RBI mandate, individual borrowers who are on floating interest rates can foreclose their loans at no additional cost. Similarly, individual borrowers who are on the fixed interest rate can foreclose their loan at no additional cost if they use their savings to foreclose the loan. However, certain lenders do charge Home Loan foreclosure fees in certain specific cases. If you have decided to foreclose the loan, talk to your lender about foreclosure charges and do a cost-benefit analysis before closing the loan. 

Inform Your Lender of Your Intention to Foreclose the Loan

Once you have decided to prepay or foreclose the loan, write to your lender informing them of your intention to do so. Your application must contain your name, address, loan account details and other important details. Once your lender receives the letter, they will inform you about the outstanding amount. Clear the outstanding amount and foreclose your loan. 

Read Also: Differences Between Fixed and Floating Interest Rates 

Home Loan Foreclosure Don'ts

Here are a few things you shouldn't do while foreclosing a loan. 

Forgetting to Collect All Original Documents 

When you opt for a housing loan, the lender keeps the original copy of several property-related documents, such as the title deed, sales deed, etc. While foreclosing the loan, remember to ask your lender to return all the original documents they have with them. 

Not Taking the No-Objection Certificate 

The No-Objection Certificate is an important legal document that serves as proof that you have cleared your loan in its entirety and the property in question now belongs solely to you. You will need NOC to settle any wrongful claims on your property as well as if you ever decide to take another Home Loan. So, remember to ask your lender for this document.

Also Read: Importance of NOC Letter after Paying off Your Home Loan

Not Getting Your Credit Score Updated

Once you have repaid your Home Loan, inform the credit information bureaus. Clearing a loan is a huge thing and loan repayment can have a huge positive impact on your credit profile. Thus, as soon as you have repaid a loan, inform the credit information bureau and have them reassess your credit score.

Final Words 

Foreclosure is an important step in your Home Loan journey, one that must be taken after careful financial planning. If you have decided to take this step, remember to keep in mind the do's and don'ts mentioned in this article.