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Want To Do Home Loan Prepayment? Know These Charges And RBI Rules

Want To Do Home Loan Prepayment? Know These Charges And RBI Rules
Want To Do Home Loan Prepayment? Know These Charges And RBI Rules
Home loan tenures usually range from 10 to 30 years. The long-term loan may sound tempting with lowered EMI amounts, but it actually has greater interest outgo. Prepayment of home loans is one of the easiest ways to reduce the total interest you pay throughout the loan tenure.

In case you have availed a home loan, decoding your home loan fees and charges should be the first thing you do to measure the pros and cons of prepaying a loan.

Home loan prepayment can be done in two ways:
  • Loan payment in part.
  • Total advance repayment.

Now, financial institutions charge prepayment penalty as there is a loss of interest inflow for them. They levy a prepayment penalty of around 0.5%-3% on the outstanding loan amount.

Part prepayment of the loans can help you in either of these two ways –
  • Lowered overall interest outgo as the tenure is reduced, or
  • Reduced EMI amount for the tenure kept the same.

Making this decision solely depends on the financial ability of the borrower and their requirements. However, one should make an informed decision so that they remain at the beneficial end of the deal. A home loan prepayment calculator can easily help you to sort out the financial requirements.

To carry out the calculation just fill-in information such as loan amount, actual tenure, interest rate, number of EMIs, and prepayment amount.

To ensure borrowers can effectively participate in the prepayment of a housing loan, Reserve Bank of India (RBI) has laid some rules that the financial institutions should abide by.

RBI Rules Regarding Home Loan Prepayment

Various home loan prepayment charges are levied on the outstanding loan amount in case of prepayment. But, the scenarios when and when not these charges should be levied are decided by these RBI guidelines.

● Home Loans With Floating Rates

Housing loans with floating rates of interest fluctuate as per the market. Since the interest rates are variable as well as the EMIs, such home loans are not subjected to any prepayment charges. Hence, financial institutions and NBFCs do not charge any prepayment fee for either part prepayment or full prepayment. One can always utilize a home loan prepayment calculator for finding out altered EMIs or tenure.

● Fixed-Rate Home Loan

If borrowers of fixed-rate home loans have accumulated funds from their other sources of income, financial institutions and NBFCs cannot add any prepayment charges for that loan. However, if the prepayment fund is borrowed from financial institutions or other similar sources, they can charge a prepayment penalty.

● Dual Rate Home Loan

Dual rate loans have a fixed rate of interest for the initial few years which turns into a floating rate home loan. According to the RBI guidelines, once the loan is morphed into floating rates, no prepayment penalty can be levied on it. However, financial institutions can charge a penalty for the prepayment of home loans if it is under a fixed rate of interest at the time.

● Loans For Non-Individuals

Non-individual loans are sanctioned to entities such as a trust, company or guarantor as the co-borrower. In such a scenario, irrespective of fixed or floating-point interest rate, prepayment penalty can be charged.

Even though the rules are important to know, one should always carefully read the loan agreement paper. The prepayment of the home loan section should adhere to these RBI rules and any non-compliance should be brought to notice before signing the agreement documents. These are some of the important clauses of your home loan agreement to keep in mind.

Prepayment of home loan can be done and in a cost-effective way only if you know these charges and RBI rules beforehand and plan your prepayment accordingly. Refer to a home loan prepayment calculator offered by leading lenders and plan your finances accordingly.

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