Many people search for various strategies to lower or combine their debt. Paying back the loan in full or in part before its entire term is one of the methods that borrowers most frequently choose from. And this is what is prepayment of home loan. I have explained it in detail below.
What is Prepayment in Home Loan?
Prepayment of a home loan refers to repaying your loan either partially or fully before the scheduled tenure ends, thereby reducing the outstanding principal and interest burden.
ICICI Bank highlights two key methods: part prepayment, where you pay a lump sum above your regular EMI, and full prepayment (pre-closure), where you close out the entire remaining balance in one go.
The immediate benefit of prepayment is significant interest savings. Any prepayment goes directly toward the principal, not interest, which means the interest component in future EMIs reduces substantially.
For example, ICICI Bank illustrates that increasing EMI by Rs 5,000 mid-tenure could reduce interest paid by Rs 2,44,067 and shave three years off the repayment schedule. However, several conditions and costs apply.
Borrowers must evaluate whether the prepayment penalty outweighs potential interest savings, and refer to their loan agreement for specific terms. This is all about what is prepayment charges in home loan.
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What is prepayment of home loan?
Home loan prepayment means paying your home loan early with the surplus cash that you have. You can calculate the prepayment of home loans with a prepayment calculator that can assist you to understand the impact of partial payment of a home loan. With the prepayment of a home loan, you can reduce your home loan tenure at the same time reduce your EMI. But we should understand that the prepayment amount is a minimum of three times that of the existing home EMI. It should be remembered that you have to pay a penalty fee if you repay the loan before the end of the term. To fix the loss and to safeguard themselves the banks charge this penalty fee. Although it should be known that the Reserve Bank of India (RBI) and National Housing Bank (NHB) have come up with guidelines to protect the interest of the borrowers as well.What are home loan prepayment rules?
RBI and NHB have introduced some guidelines for prepayments to safeguard the interest of the borrowers.- Banks cannot levy prepayment loan penalty fees more than the amount that is included in the loan agreement.
- Banks can only charge penalty fees at fixed rates. And this information should be embedded in the agreement between the bank and the borrower during the time of home loan sanction.
- HFCs can charge a penalty fee if the borrower is paying the loan with the help of another loan from HFC or a different bank. If you are paying the loan from your own resources you don't need to pay the HFC penalty fee.
- If you have applied for dual-rate schemes you will have to pay a penalty fee based on a fixed-rate loan. If your loan becomes a floating rate loan bank will not charge you a prepayment penalty.
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What is prepayment of home loan?
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2021-12-31T16:02:16+00:00 2021-12-31T16:51:57+00:00Comment
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