All you need to know about Home Loan Prepayment


All you need to know about Home Loan Prepayment

A home loan is in fact, a financial help taken by the borrower to purchase land or any property. While, it is a sort of financial help to the people who are in dire need of money in order to relish the dream of owning one’s own home. It is also considered as a great responsibility. There are choices to repay loan. The repayment of Home loan before the agreed loan tenure is one of them. There are times, when there is  an instant cash inflow like bonuses, business gain, policy mature and people opt to repay the existing loan in order to ease some burden. Home Loan Prepayment is just an option for those people, who are of the motive to ease off all sorts of financial restrictions as imposed by the lender on the lifestyle of the borrower.

What is prepayment?

Home Loan Prepayment, a term to describe the early repayment of Home loan by a borrower, which may be in part or in full. The Prepayment of Home Loans can be as a result of several factors, in order to refinance to take advantage of lower interest rates. The home loan prepayment is sort of paying off all debts before the time being decided during the Home loan start off.

Prepayment Charges :

With the huge availability of Home loans in the market through different lenders, there is no dearth of options available to the people at the dispense suiting their requirements. While, the loans of different kinds have different policies upon which the whole process of loans work, things have to be sorted out based on the type of the loans. The home loans, in fact, are just one of the various kinds of loans available in the market.
When talk about the prepayment charges of home loans, it depends on whether the Home loans are a fixed rate or floating rates. In case, of Home loans with floating rates of interest, there is no prepayment charges as such and a person is free to pay the remaining amount, at any moment of loan tenure except for the lock in period of the first year of the loan tenure, depending on the bank.
Talking about the home loans with the fixed rate of Interest, the penalty is applicable and the amount of penalty depends on the bank. In the banks like ICICI, the prepayment is around 2% plus applicable taxes on principal outstanding on full repayment of Home loans. The same rises to 4% plus applicable taxes on principal outstanding where the loan is given to Non Individual borrowers or with a fixed rate of interest to Individual borrowers. The  HDFC Bank states that, no prepayments are allowed in first 6 months, after which prepayment charges is 1.5% of the original loan amount up to 5 years. From 5 years to 10 years, the prepayment charges is 0.75% of the original loan amount and after which, there is no closure fee.

Things to consider before home loan prepayment :

There are several factors, to consider before making the decision over the home loan prepayment. One must analyze all the aspects of the home loans before going to the prepayment. One must go through the following factors before considering the home loan prepayment.
A loan owner must first compare this amount against the overall interest, which a person will save in terms of interest, even if the loan contract does stipulate a prepayment fee or penalty.
In some instances, the prepayment is made possible only after a minimum stipulated period of loan ownership as stated above in the blog. Thus, in order to capitalize on these provisions, borrowers must first of all go through the terms and conditions as mentioned in the loan contract.
Make a decision based on the current interest rate on your home loan. Depending on whether the home loan rates are high, you can make a decision over the prepayment of the loan.
Also Check – Home loan Rejection Causes

Advantages / Disadvantages :

The Home loan prepayment draws several advantages and disadvantages of its own. The below mentioned are the advantages and disadvantages in connection to the home loans.

Advantages – Reduction of Interest Payouts :

The most obvious advantage concerning prepayment is that the interest payout reduces with the prepayment. Prepayment of home loan in fact, results in an immediate reduction of the outstanding principal on the home loan and thus resulting in the less interest which applies on the loan account over the tenure.

Advantages – Peace of Mind :

Paying off all your debts allows you to have a peace of mind, which these days, is one of the most preferred thing among the people.

Advantages – Security of your Home

With the competition of the loan, your property is now completely yours and thus a fear of losing the property because of any undue reason is all in a one, being cleaned up.

Disadvantages – Penalty Charges :

The most important thing to consider is the penalty associated with the Home loan prepayment. Many Home loans draw a penalty charges and when it’s fixed rate home loans, all the home loan prepayments draw a penalty. While, the floating rates Home loan in most of the cases, does not allow prepayment for a stipulated time. Thus, one has to analyze the amount being given as a penalty.

Disadvantages – Missing out on Tax Benefits :

With the prepayment, you are going to miss out on the tax benefits. One must remember the fact when you pay interest on home loan that interest is tax-deductible in the country and as soon as you get free of the home loans, you will lose that advantage.
The home loan prepayment is one of the important aspects which come with the home loans and other kinds of loan types. But, one has to analyze all aspects and calculate everything in case you’re thinking about home loan prepayment.
One must be informed about all the charges and the cost associated with it.

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