What is the Pre-payment of a Home Loan ?

Pre-payment of a Home Loan

Pre-payment of house loans is a preferable decision to close the loans and decrease the financial liabilities. Therefore, most house loan borrowers apply for pre-payment as soon as they get enough money or some funds. Payment of due amount before scheduled tenure in part or full is Pre-payment of home loans. Though it is a good thing to do to reduce the financial burden, certain aspects need to be considered before moving ahead with the process.

Factors to consider for Pre-payment of house loan


Every house loan borrower can apply for pre-payment of the house loan. Please read thoroughly the terms and conditions related to pre-payment at the time of signing the loan agreement with the bank or loan distributor.

Bank’s Dilemma

Banks do not want loans to be closed before scheduled dates because they need to bear the additional cost of rerouting the amount through a credit channel. Therefore, it is advisable to ask your lender’s policies concerning pre-payment and foreclosure beforehand.

Financial commitments

Pre-payment of home loans for foreclosure is a big step. It needs a lot of money. Before going forward with the process, ensure that you do not have an immediate financial commitment that can be affected if you spend a large sum of money for closure. There are certain emergencies and essential requirements such as medical, admissions, etc. Therefore, you should maintain sufficient funds for such situations and sudden needs. The purpose is to be ready for emergencies and decide pre-payment with a strategy, not in haste.

Optimum Utilization of Surplus funds

People tend to pay the loan amount out of their surplus fund. So, if you are also considering closing the loan before tenure with the surplus fund, think twice!! The surplus fund can be used as an investment in mutual funds, equity, etc., for higher returns than saving on interest on the loan. Consider and compare if your returns from investments are higher than interest on a home loan; you should reconsider the decision to prepay the loan amount.

Stage of home loan tenure

The main purpose of pre-payment and foreclosing the home loans is a reduction in interest amount. The banks and loan distributors keep higher interest in the beginning years of the house loan tenure. Interest rates gradually decrease with months and years. So, if you close the home loan in the middle of the tenure or the beginning, there would be hardly any savings on interest. The purpose is to consider the stage of the loan and plan accordingly.

Interest rates

Housing loans are of low interest in comparison with credit cards, personal loans, etc. So, if your sole objective for pre-payment is to save on interest money and you have other financial instruments and loans, please foreclose them first before closing the home loans.

Tax benefits and Government Schemes

The Government provides tax exemptions up to 1.5 lakhs per annum on house loans in India. However, if you foreclose the house loan by pre-payment of the loans, you will not get tax benefits. With Prime Minister Awas Yojana and other schemes, the Government is pushing for more home loans. However, with pre-payment of loans, you will lose benefits from government schemes.

Pre-payment charges by Banks and NBFC

As per the notification of the Reserve Bank of India, “NBFC shall not charge pre-payment penalties or foreclosure charges on any floating rate term loan sanctioned for requirements other than business to individual borrowers, with or without co-obligate(s).” For Banks, most of them do not charge pre-payment charges on home loans. However, some of the banks levied fees of around 2 to 6 percent on the outstanding amount. This is all about pre-payment of home loans for foreclosure. So, refer to the definition mentioned above, aspects, RBI guidelines, and make a correct decision about a home loan.