Home Loan Prepayment
- There was a time when pre-payment of housing loan attracted penalties. Though this was considered anti-borrower policy, penalty was charged anywhere between 2 – 4% if the pre-payment amount exceeded the specified amount that could be prepaid.
- However, on 9th October 2011, the NHB (National Housing Board) had given a directive to scrap penalty on pre-payment of housing loans. All the 54 housing finance companies had to abide by the directive.
- The pre-payment penalty is abolished for floating interest rate loans. This enables the borrower to either prepay his loan or move his loan to other housing finance company that offers better terms by refinancing the old loan.
- The pre-payment penalty on fixed interest rate loan is not abolished. However, if pre-payment is done with own funds, then the penalty is not levied.
- The amount that is prepaid reduces the outstanding principal amount of the loan. This reduces the number of installments of a housing loan thereby potentially reducing the tenure of the loan.
- Prepayment if made in a balanced and calculated manner can reduce the cost of loan (interest charged).
- Tax is saved in the form of prepayment of loan if the total principal deducted from aggregate annual EMI is less than 1 lac rupees.