Prepayment of Home Loan: Charges & RBI Rules

In the present day scenario, when the real estate prices are rather high, purchasing a residential property becomes an uphill task for many of us. Thankfully, banks, housing finance companies, and non-banking financial institutions offer Home Loans, wherein they lend loans up to 80% of the market value of the property. We only need to arrange for the remaining 20% to make the down payment.

A Home Loan does make it extremely convenient to make this big-ticket purchase; however, you must understand that the financing for home comes at an additional cost, incidentally the interest rate charged on the loan amount. The cost of interest rate is high, especially because a Home Loan can last anywhere between 10 to 30 years.

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A great way to cut down on the interest outgo is to make prepayments on the Home Loan. Let us understand how to plan prepayment of home loan and reduce the entailing cost in greater detail in this article.

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Home Loan Prepayment

You can prepay the home loan in part or full. In case you need to make the advance payment in part, the amount paid must be equal to or more than two months’ of EMI. A prepayment is usually made as a way of reducing the overall interest outgo, by effectively reducing the tenure. Besides, it also helps reduces the burden of the long-term financial commitment that a Home Loan usually is.

A Home Loan prepayment can and should only be made when you have additional funds in your hands.

Prepayment Penalty

Since prepayment reduces the Home Loan tenure, it causes loss of interest inflow for the lender. Hence, most lenders discourage prepayment and therefore levy a prepayment penalty, which usually ranges from 0.5 to 3% on the outstanding loan amount.

However, the prepayment penalty is only levied on Fixed Rate Home Loans, while Floating Rate Home Loans are exempt from this fee.

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Prepayment Calculator

While most Home Loan borrowers opt for prepayment in a bid to reduce the tenure, while keeping the EMI constant, certain borrowers make part prepayments to reduce the EMI amount, without making any changes in the tenure.

This decision usually depends on the financial standing of the borrower as well as their capacity to shell out money towards prepayment as well as EMIs.

To understand the actual impact of making a prepayment towards the Home Loan, one needs to be aware of the total savings they could make on this deal. A simple yet efficient manner to carry out this calculation is by making use of a Home Loan prepayment calculator.

All you need to do is open any Home Loan Prepayment Calculator online, and key in the loan details including:

• Actual Loan Amount
• Actual Repayment Tenure
• Home Loan Interest Rate
• Number of EMIs Paid Till Date
• Prepayment Amount

Once you enter the following details, you will receive two types of results:

1. Reduced EMI, as well as monthly and overall savings after making part prepayment
2. Reduced tenure, as well as monthly and overall savings after making part prepayment

If need be, you can also look for a Home Loan Prepayment Calculator, with an amortisation table and have a clear and better understanding of your anticipated savings.

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RBI Guidelines for Home Loan Prepayment

The Reserve Bank of India (RBI) in conjunction with the National Housing Bank (NHB) has laid a set of guidelines pertaining to Home Loan prepayment, as a way to safeguard the interest of the borrowers.The guidelines allow them to prepay their Housing Loans most efficiently and cost-effectively. While the RBI rules primarily apply on Banks, the NHB rules are drafted for Housing Finance Companies. 

These rules are in line with the circular titled – “Levy of foreclosure charges/prepayment penalty on Floating Rate Loans,” which was released in the year 2014.

• Banks and HFCs cannot levy prepayment fees in the following situations:
• Floating Rate Home Loan

For Floating Rate Home Loans, banks and HFCs are not allowed to charge a Prepayment Fee, either on Part Prepayment or Full Prepayment.

• Fixed Rate Home Loan from HFCs

When the borrower makes the prepayment for a Fixed Rate Home Loan from their own sources of income, the HFC is not allowed to charge a prepayment fee.

• Dual Rate Home Loan

In case where Home Loan has been shifted from Fixed Rate to a variable rate, the Bank or HFC cannot levy a prepayment charge.

• Banks and HFCs can levy prepayment fees in the following situations:
• Loans taken by Non-Individuals

When non-individuals procure a loan from a bank or a Housing Finance Company, both Floating as well as Fixed Rate Home Loans attract prepayment penalty. In this case, when a company or a firm acts as the borrower or co-borrower of the Home Loan, they are considered as non-individuals.

• Fixed Rate Home Loans

In case of Fixed Rate Home Loans, banks and HFCs are allowed to charge a prepayment fee, both on part prepayment, as well as on full prepayment.

• Dual Rate Home Loans

In case when individuals opt for Dual Rate Home Loan, wherein the interest rate on Housing Loan is fixed for the initial few years, and turn variable later on, banks can levy a prepayment penalty, if the prepayment is during the period when the loan attracts a fixed interest rate. Once the loan starts accruing floating rate, the banks cannot levy the prepayment penalty.

While banks and HFCs are liable to adhere to the guidelines laid down by the RBI and NHC, at the time of signing the loan agreement, you must carefully read the section pertaining to the prepayment charges.Do check whether all the terms and conditions are in line with the prepayment rules of RBI, regardless of what you have been verbally told by the sales manager or Home Loan officer.

If the prepayment conditions of the loan do not match with the RBI guidelines, make sure to take up the matter with the bank authority, prior to signing the loan agreement.

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