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:

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 –

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.

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.

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.

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 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.

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.

Additional Read: Is
Choosing Home Loan Prepayment A Wise Choice?

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.