All You Need to Know to Pre-close a Home Loan in India

It had been a dream of hers, and now it was a reality. After having lived in a cramped apartment for close to a decade, Priyanka Kapoor finally decided to take the plunge, sell her apartment, and buy a villa.

Being a seasoned real estate investor, it did not take her long to find a buyer for her old apartment. Now, she was in a dilemma. Should she pre-close her home loan or invest the money received from selling her old apartment in another asset class?

Priyanka chose to pre-close her home loan. “I found it logical over paying interest to the bank,” says Priyanka.

Was it a wise decision? We find out in this post.

First, what is pre-closing a home loan?

In a layman’s term, when a person repays his loan amount before the set tenure, it is termed as prepayment. This payment can be made partially or completely, depending on the funds.

So, why is this done?

There can be two major reasons for this:

• The borrower may have arranged the required finances (like in Priyanka’s case), or
• The borrower wants to opt for refinancing to avail lower interest rates

What is the need for home loan prepayment?

One of the major benefits of prepaying a home loan is to get rid of the interest payment, which usually is a huge amount. Another thing you need to factor in here is the cost of the property.

Let’s say, you bought a property at X amount and borrowed 80% of the cost from the bank as a home loan. With interest, you will end up paying more than the actual cost of the property. In such a scenario, it is always advisable to repay the loan as soon as possible.

Having said this, there can be cases when continuing the home loan can be beneficial. For instance, if you are comfortable paying your EMIs without any financial burden, it makes sense to continue the loan to reap tax benefits.

Is there any penalty?

Yes. All the banks and housing finance companies charge a prepayment penalty if the loan is closed before the set tenure (unless you have an exception in your agreement). The penalty may vary from 3-5%.

“In 2013, the Reserve Bank of India waived off the prepayment charges on floating rate loans.”

Thus, if you are on floating interest rates, you don’t have to pay any charges. However, this rule is not applicable if you are on a fixed rate.

What is the process of prepayment?

Being true to our promise of being your friend for anything and everything related to real estate, here’s the step-by-step guide that will help you understand the process.

• The first step is to inform your bank by writing an email and sending a written application for the same.
• At your end, the next step should be making a list of documents that you submitted while making the loan application. This will come in handy while recovering your original documents. Some of the common documents involved in the process are:
  – Sale Deed
  -Conveyance Deed
  -Builder Buyer Agreement
  -Possession Letter
  -Tripartite Agreement
• Keep your identification proofs, loan agreement, and all the other documents that were involved in the loan process handy.
• Once the payment is completed, you will receive an acknowledgement of your payment from the bank.
• Ensure that the acknowledgement is duly stamped and signed by the bank.
• In addition to the acknowledgement, you will also receive a No Objection Certificate (NOC) stating that there are no pending dues. The NOC must have details like your name, home loan account number, and address.
• The list that you made in the second step will now come into use. Collect all the original documents given to the bank. It is good practice to collect these documents in person rather than having them couriered to your address.
• Next in line is the Encumbrance Certificate (EC) that contains details of all the financial transactions related to your property. Once your loan is closed, it should reflect in the EC. Thus, after receiving the NOC, you have to apply for an EC in the Registrar Office.
• And you are almost done! Wondering why we wrote ‘almost’? Well, it’s the time to update your CIBIL records to improve your score. For this, your bank must send the details to the CIBIL authority. It may take a month’s time to update the records and for it to reflect on your report.

Some points to remember

• As already mentioned, it may be advisable to invest money in other asset classes for investment like gold, shares, mutual funds, etc.
• Don’t forget to read the terms and conditions before you prepay the amount.
• Keep a track of your bank statements that reflect your EMIs.
• Make sure to always keep a photocopy of the cheque or the demand draft.
• It’s always good to organise all home loan related documents in one file.
• Always avoid hasty decisions.
• Avoid burning all your savings to repay the loan. It may add to the financial stress and may impact your lifestyle.