All You Need to Know About Home Loan Foreclosure

The interest that a borrower pays a lender on the Home Loan principal is directly proportional to the loan tenor – the longer the loan tenor, the higher the total interest pay-out. It is, thus, that most borrowers try to close a loan as early as possible. People often use their yearly bonus or the payment from a policy that has matured or any other lump sum payment they receive to clear their loan. When a borrower pays a portion of their Home Loan, it is known as prepayment and when a borrower pays off the entire pending amount and closes the loan before the agreed tenor, it is known as Home Loan foreclosure. 

Is it Good to Foreclose Home Loans? 

If you pay off your Home Loan before the agreed tenor, you will benefit in two ways. First, you will save on the total interest payout. Second, since you won’t have any EMI obligation to take care of, you will experience higher liquidity.

However, Home Loans come with tax benefits and after a Home Loan foreclosure, you won’t be able to avail of these tax benefits. Further, while individual borrowers who are on a floating rate of interest are not required to pay any Home Loan foreclosure fee, lenders charge a foreclosure fee from borrowers who are on a fixed rate of interest. Borrowers should, therefore, make an application for foreclosure of a Home Loan after considering the various pros and cons of Home Loan foreclosure.  

Also Read: Foreclosing a Home Loan and their Dos and Don'ts 

Factors to Consider Before Opting for Home Loan Foreclosure

Difficulty in Paying Your EMIs

Are you finding it difficult to pay your current EMIs? If yes, you have a couple of different options. You can either request your bank to increase your loan tenor and this will make your EMIs feasible or you can opt for a Home Loan Balance Transfer and choose to go with a lender offering you a lower interest rate. When you opt for a Home Loan Balance Transfer, your new lender will clear off your loan with your previous lender and once you have foreclosed your previous loan, your new obligation will be to your new lender. However, if you are opting for a Home Loan Balance Transfer, know that there is a fee involved and thus, one must avail of this facility after performing a proper cost-benefit analysis. 

Consent to Losing Out on Tax Benefits

A Home Loan helps borrowers save a lot of funds by way of Home Loan tax benefits. Under Section 80C of the Income Tax Act, borrowers can claim tax deductions up to a maximum of Rs.1.5 Lakh on payments made towards principal repayment and under section 24(b), a borrower can claim up to a maximum of Rs.2 Lakh on payments made toward interest repayment. Make an application for foreclosure of a Home Loan  after considering this aspect. 

Timing of Your Home Loan Foreclosure

Before opting for a Home Loan foreclosure, you should check if now is the right time for you to opt for a Home Loan foreclosure. When borrowers opt for a Home Loan foreclosure, they exhaust their savings. If foreclosing your loan would require you to exhaust all your savings, foreclosure may not be such a good idea for you. Similarly, if you are nearing your loan tenor, foreclosing a loan may not be advisable as you won’t save much interest but you may end up exhausting your savings, which is never advisable. 

Borrowers must consider these factors before they make an application for foreclosure of a Home Loan. Now that we know what Home Loan foreclosure is, let us look at the steps involved in the process. 

How to Apply for a Home Loan Foreclosure?

If you are planning to apply for a Home Loan foreclosure, you will be required to follow these steps. 

1. To start with, inform your lender of your intention of wanting to foreclose your Home Loan. 
2. After this assess all the payments involved. If there is a charge that you don’t agree with, talk to your lender. 
3. Once you have cleared the pending loan amount, ask your lender to release the no-objection certificate. Obtaining this certificate is important as it serves as proof that you have foreclosed the loan and there is no liability on your regarding it now. 
4. If you have a lien on your house, get it removed as soon as you clear your loan. 
5. Once you have removed the lien from your property, also get the Encumbrance Certificate and all original property documents. 
6. Lastly, once you have foreclosed the loan, write to your credit agency.

Final Words

Foreclosing a Home Loan can offer immediate benefits, such as saving on total interest payments and increased liquidity. While individual borrowers with floating interest rate Home Loans do not have to pay any additional charges to foreclose the loan, borrowers with fixed interest rates might have to pay foreclosure fees. Hence, one must opt for this facility after careful consideration and proper planning.   

*Terms and conditions apply.