What is Home Loan pre-closure? 5 things to know

January 11, 2022

What is Home Loan pre-closure? 5 things to know.

Borrowers have the option to prepay their Home Loan, by repaying the outstanding loan amount before the completion of the loan tenure. Read this post to know 5 important things about loan pre-closure.

However, banks and other financial institutions offer the Home Loan pre-closure facility to help the borrowers prepay the loan, in parts or in full, before the actual loan tenure, to secure significant savings on the interest outflow. It is generally done when a borrower secures a lump sum amount or even while using the Balance Transfer facility for switching to another lender.

Before deciding to close a Home Loan, a borrower should know about a few important things. Take a look:

Prepayment penalty

If you want to pre-close a Home Loan availed on a fixed interest rate, you will have to pay the penalty for using this facility. You can check the applicable prepayment charges on the lender’s website. However, no such penalties are applicable on prepaying a floating interest rate Home Loan. If the goal is to save on interest, keep the Home Loan pre-closure charges in mind and ensure that the savings are significantly higher than the penalty.

Prepayment lock-in

It might not be possible to pre-close the loan within the first few months of the repayment cycle. Depending on the lender you have selected, there can be a lock-in period of 1 - 3 years for using the pre-closure facility.

You can only pre-close the loan after paying EMIs throughout the lock-in period. You can contact your lender, to know more about the same.

Types of Home Loan closure

There are a few different Home Loan closure types that the borrowers should know about. They are as follows:

  • Regular Pre-Closure: This is the standard pre-closure facility that allows the borrowers to prepay the loan before the tenure
  • Bad Loan Closure: If a borrower cannot repay the Home Loan, the lender can close the loan by confiscating the property
  • Settled Loan Closure: If a borrower cannot repay the entire loan amount, the lender might be open to negotiating the outstanding amount to make it more affordable.

Process for prepaying a Home Loan

Here’s a quick overview of the Home Loan pre-closure process:

  • Inform your lender about your wish to prepay the Home Loan
  • The Lender will issue a Foreclosure Statement with details of the outstanding loan amount
  • Repay the outstanding amount and collect the original property documents from the lender.

Points to Note:

Here are a few other things you should know about the loan pre-closure process:

    • Lenders use the reducing balance method for calculating the interest on your Home Loan. So, the interest component is the highest when you start repaying the loan, and it falls steadily over the years. For maximum savings, try to prepay the loan in the earlier years of the repayment cycle
    • Once you close the Home Loan, you will no longer be able to claim tax deductions under Section 80C and Section 24B. Apart from the Home Loan pre-closure fees, do consider the tax aspect before making the decision.

Using the Home Loan Pre-Closure facility

Home Loan Pre-Closure can help borrowers save a significant amount of money through interest savings. But the option should be used carefully after considering the mortgage loan pre-closure charges and your current expenses. You can consult your lender to know more about loan prepayment and the exact amount you will be saving after deducting the penalty.

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