Prepaying your mortgage loan is something to think about if you want to lessen your debt load. You have the option of paying off your mortgage partially or entirely whenever your financial situation improves. Prepayment of a mortgage is when you pay off your loan entirely or partially before the agreed-upon time frame.
Despite the fact that the majority of banks permit house loan prepayment, some may impose a minor cost for early closure. Therefore, it's a good idea to weigh the benefits and drawbacks of foreclosure before making a decision.
Who is Eligible for Home Loan Prepayment ?
If their bank provides this option, all homeowners with house loans are eligible for pre closure. At the time of borrowing money, you can make sure that you have the option of prepaying your mortgage.
Because it costs them money, most banks do not support prepayment. Banks incur extra expenses for rerouting the cash through the credit channel when you choose to pay off a loan early. In light of this, banks could charge you for preclosing your loan.
However, if doing so will benefit you in the long run, you are well within your rights to foreclose your debt entirely. The loan should be foreclosed if you are still saving money on interest even after paying the fee.
How Does Prepayment Of Home Loan Work?
It's possible to prepay your mortgage in a variety of ways. You have two options: you can pay off a portion of your debt or you can go all out and entirely repay the loan before the due date. Both of the two can be worked on simultaneously.
After beginning small, increase your prepayments gradually
One method of prepaying a mortgage is to begin with a modest sum early on and gradually increase it each year at a fixed rate. You can do this by setting money aside throughout the year and using that money to make prepayments.
Amount of the fixed prepayment
Prepaying a set sum towards your principal each year in this manner is possible. Along with your EMI payments, you must also complete this.Establish a fixed annual saving and plan your expenses throughout the year. Prepaying will lower your principal, so use these savings to do so.
Increasing EMI
Paying in excess of your estimated EMI is another approach to lower your principal. Pay a small amount more than your EMI each month. Your debt load is significantly lowered by doing this.
Complete repaid mortgage
You can pay off your house loan in full before the term expires if your financial situation has significantly improved or if you have been able to raise a sizable amount of money. The full payback of your mortgage may, however, result in a fee.
Home Loan Prepayment Rules
The guidelines for "Levy of foreclosure charges/pre-payment penalty on Floating Rate Loans" are periodically revised by the Reserve Bank of India (RBI). It details the circumstances under which banks and housing finance companies (HFCs) may impose prepayment fees.
When are banks and HFCs allowed to charge prepayment fees :
Non-individuals Obtain a Home Loan: A business or organisation that takes out a loan to buy a home is not excluded from the costs associated with foreclosure.
Mortgage with a Fixed Rate: If you have a mortgage with a fixed rate, you will be charged a foreclosure fee if you pay off the debt early. The interest rate on a fixed-rate loan remains constant for the duration of the loan. A penalty for house loan foreclosure may be assessed by banks and HFCs alike. However, if you are repaying the loan by borrowing from another bank or HFC, HFCs cannot impose a penalty. If you pay off the loan early using your own money, HFCs cannot impose any prepayment penalties.
Mortgages with a Fixed Rate and a Floating Rate: Mortgages with a Fixed Rate and a Floating Rate, or dual rate mortgages, may be foreclosed without incurring a penalty from the bank. For the first several years in such circumstances, the interest rate is set before changing.
When are banks and HFCs not allowed to charge prepayment fees :
Floating Rate Home Loan for Individuals: Individuals who take out floating rate house loans are not subject to prepayment fees or penalties, according to home loan prepayment regulations. Both partial and full repayment of the loan are not subject to an additional fee.
Paying Fixed Rate Home Loan from HFCs with Own Funds:When a person repays a fixed-rate house loan from an HFC with their own money, the lender is not allowed to impose prepayment penalties.
Dual Rate Home Loan: If the borrower prepays the loan after it has switched to a variable rate plan and has become a floating rate loan, neither banks nor HFCs may impose a penalty.
Conclusion
The best course of action isn't usually to prepay your mortgage. Prepaying your debt should only be an option if the long-term advantages outweigh the associated penalties. Prepayments can result in significant interest savings if they are planned well.
