Home Loan Prepayment
A loan is a useful financial vehicle that gives birth to many a middle class dream. Home loans among such loans are one of the biggest commitments from common man’s perspective in India. With long tenures these loans, sometimes outlive the individual.
There is one option through which an individual can bade adieu to his loan and become the complete owner of his/her house. Loan prepayment is an option where the person pays a sum higher than his regular installments to reduce the principal amount of his loan. If the prepayment amount is high enough it can also reduce the tenure of the loan.
Several factors contributed to the prepayment penalty being abolished, with concerns regarding the various practices by banks being the primary factor. While old customer was charged higher interest rates, the new customers were lured often, with lower rates. This meant loyal and old customers were punished with higher rates. Abolishing prepayment penalty meant, the old customers could move to other banks and enjoy lower interest rates.
Facts to know about 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.
Benefits of prepayment of housing loan:-
- 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.
Contributed By: Aruna Sharma |
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Mrs. Sharma holds a Masters in Financial Management from University of Mumbai. She has graduated from the University of Mumbai. | |
- Kalyan Ghosh:My son has taken a Home Loan from HDFC,,Hyderabad for a property at Hyderabad.I am from Kolkata.My son is abroad. My question is whether during his absence I can make prepayment of Principal Amount in favour of his Loan A/C No at any of the HDFC Kolkata office I am a Retired Govt Official at a Senior level and to the best of my knowledge NEAR RELATIVES(Father to Son)CAN MAKE PREPAYMENT IN FAVOUR OF THE SON WITHOUT ANY PREPAYMENT PENALTY and Father's contribution should be considered.11-Mar-2013 03:46 PMReply
- seema sood:I want property loan. can I pre-pay the amount or I have to pay fixed installment.17-Sep-2012 04:13 PMReply
