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Home loan preclosure charges: Complete guide

Home loan foreclosure, also known as pre-closure, refers to the process of repaying the entire outstanding loan amount before the completion of its original tenure. Borrowers often choose foreclosure to reduce interest outgo and become debt-free sooner. However, lenders may apply home loan foreclosure charges, a fee imposed for closing the loan account ahead of schedule. These charges vary depending on the lender, loan type, and borrower profile. Understanding foreclosure and its associated costs is crucial for making informed financial decisions when planning early loan repayment.

The lender calculates home loan foreclosure charges based on payment penalty percentage, interest on the amount you have prepaid, the tenure of your loan and whether they have fixed or floating interest rate. Reviewing your loan agreement to understand these charges and comparing different lenders is prudent.

Home loan foreclosure charges also depend on whether the borrower repays the loan with their funds or through another funding source. Some borrowers may consider refinancing with a different lender because of attractive interest rates. Here is how this works:

  1. The borrower will get loan approval from their desired lender.
  2. The lender will then close the home loan by repaying the loan amount to the existing lender.
  3. The borrower has to repay the loan to their new lender at the new interest rate.

Financial institutions have different home loan closure charges for individuals and non-individuals. It is prudent to shop around and understand your financial needs and repayment ability before committing to a loan.

Tata Capital’s home loan foreclosure charges

Home loan foreclosure charges vary for every financial institution. Tata Capital does not charge any home loan foreclosure or pre-payment charges if the borrower repays the entire loan amount before the scheduled end of the loan term using their own funds.

Types of home loan closures

Here is a look at the various types of home loan closures:

  • Preclosure: This refers to when you choose to pay off your entire loan before the end of your loan tenure. In other words, you decide to close your loan obligations by paying the outstanding amount earlier and saving on the interest that you would have to pay if you decided to complete the tenure.
  • Regular closure: This involves repaying your home loan according to the decided schedule throughout the loan tenure.
  • Inadequate home loan closure: If the borrower faces financial setbacks that affect their ability to repay the loan as scheduled, lenders may consider waiving the fees.
  • Settled home loan closure: In case the borrower is unable to repay the entire loan amount, the lender might offer a discounted rate to settle the overdue amount of the loan while waiving the remaining amount.

Steps for home loan foreclosure

After analyzing different home loan foreclosure charges, here are the steps you can follow to close your loan before the repayment term ends:

  1. Visit your lending institution to notify them about the loan you’re intending to foreclose and the date of closure.
  2. Submit all the loan-related documents, including the loan agreement and the EMI receipts.
  3. Pay the loan amount and the home loan foreclosure charges. You can make the payment through a cheque or bank transfer, depending on your preference.
  4. Collect your home loan foreclosure letter. It is provided by the lender and certifies that you have repaid the entire loan amount.

Documents required after home loan foreclosure

Once you have paid home loan foreclosure charges, ensure to collect the following documents from the lender:

  • In the case of the unfortunate demise of the borrower, collect the original property documents in the power of attorney format from the lender.
  • To collect the original property documents, the legal nominee must write an application to the lender.
  • A letter of abdication is necessary to surrender the property to the legal nominee.

Points to remember during home loan foreclosure

Following the process of closing a loan properly is just as crucial as following the process of borrowing a loan. Here are some points to remember while foreclosing your home loan:

  • Collecting all the documents is necessary. While availing of a home loan, the original property documents are given to the lender. Ensure to collect those documents after foreclosing your loan.
  • The No Objection Certificate proves you have closed your loan. It is an essential document as it helps you with future loans.
  • Closing a loan on time adds to your credit score. Remember to ask the lender to update your credit score to boost your creditworthiness.
  • Carry your government ID proof, as it is necessary to close your loan.
  • Also, carry your chequebook to pay the final settlement and home loan foreclosure charges of the home loan.
  • Collect the acknowledgement of the final payment from the lender. Ensure that it is duly stamped and signed by the official.

Factors affecting home loan foreclosure charges

The following factors determine the home loan pre-closure charges:

  • Outstanding loan amount: The base of the foreclosure amount depends on the principal amount that’s still due.
  • Accumulated interest: The foreclosure amount includes the interest accrued on the loan up until the foreclosure date.
  • Pending EMIs: The final foreclosure amount considers any overdue or unpaid Equated Monthly Installments (EMIs).
  • Loan type and tenure: The loan’s structure and period impact the calculation of the foreclosure amount. The penalties are lower for shorter-term loans.
  • Other charges: Some lenders factor in administrative or processing fees for foreclosure handling.

Conclusion

Understanding home loan pre-closure charges is necessary to make wise financial decisions. By foreclosing a home loan, you can eliminate interest costs and improve your monthly cash flow. You can also improve your chances of securing loans at more favorable terms if your credit score has improved. However, carefully evaluate your loan terms and financial situation before proceeding to foreclose the loan. Forecasting the potential impact of home loan foreclosure can help you fulfill your financial goals.

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FAQs

What are home loan foreclosure charges?

Home loan foreclosure charges are the fees imposed by the lender on the borrower if the borrower decides to repay the loan amount before the end of the predetermined repayment tenure.

Why do lenders impose foreclosure charges on home loans?

Lenders impose home loan foreclosure charges in home loans to compensate the income they may have earned from the interest if the borrower repaid the loan amount according to the decided repayment tenure.

How are home loan foreclosure charges calculated?

Foreclosure home loan charges are calculated based on factors like fixed or floating interest rates, prepayment penalty percentage, loan repayment tenure, and other additional charges, if applicable.

What are the rbi guidelines on foreclosure charges on home loan?

According to the RBI, lenders cannot levy foreclosure charges or penalties for prepayments on home loans for loans with floating interest rates.

How can I avoid the foreclosure charges on my house loan?

You can avoid foreclosure charges by opting for a house loan with a floating interest rate, as the RBI restricts lenders from levying foreclosure and prepayment charges on such loans.

Does foreclosure home loan reduce interest rate?

The foreclosure of your home loan can help you save on the interest you would have had to pay during the remaining loan tenure. However, foreclosure of your home loan doesn’t reduce interest rates.

What are the benefits of home loan foreclosure?

The benefits of home loan foreclosure include improving your credit score, saving on interest payments, and decreasing your financial obligations.

Is it a good idea to foreclose on a home loan?

Yes. Foreclosing a home loan is beneficial in several ways, provided the borrower is comfortable in repaying the outstanding debt without burdening their finances. It shortens the loan tenure, thereby enabling the borrower to save on interest expenses. It also increases monthly cash flow by eliminating EMIs.

What are the differences between home loan pre-payment & home loan foreclosure?

The key difference between home loan pre-payment and home loan foreclosure lies in the amount paid. Pre-payment refers to paying an amount greater than the EMI or a partial amount of the loan principal. On the other hand, foreclosure involves paying the entire outstanding loan amount before the end of the loan tenure.

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