Prepaying Home Loan: Check preclosure fees, charges, pros and cons

Home loan pre-closure benefits and drawbacks: Purchasing a home is a significant milestone in an individual's life — one that is often accompanied by the need for financial assistance through a home loan. As the loan tenure progresses, home loan borrowers have the option of pre-closing their home loan account by repaying the debt owed to the financial institution. And home loan pre-closure, while offering enticing benefits, also comes with certain drawbacks that must be carefully considered. Here we explore the preclosure fees charged by leading financial establishments and the advantages and disadvantages of home loan pre-closure to help borrowers make informed decisions.

Prepaying home loan: Benefits of home loan pre-closure

Interest savings: One of the primary benefits of pre-closing a home loan is the potential for substantial interest savings. Home loans accumulate interest over their tenures, and by repaying the loan early, borrowers can significantly reduce the overall interest paid.

Financial freedom: Pre-closing a home loan frees borrowers from the burden of monthly mortgage payments. This new-found financial flexibility can be directed toward other investments, savings, or to pursue other investment opportunities.

Reduced debt burden: As home loan can be a significant debt obligation, pre-closure relieves borrowers of this liability, which can lead to a sense of accomplishment and reduced financial stress.

Credit score boost: Successfully closing a major loan account like a home loan can have a positive impact on one's credit score, as it demonstrates responsible financial management.

Improved eligibility: With the home loan no longer reflecting on the credit report, borrowers may become eligible for other types of credit or loans more easily.

Prepaying home loan: Demerits of home loan pre-closure

Prepayment charges: Many lenders impose prepayment charges or penalties on borrowers who opt for home loan pre-closure. These charges can offset some of the interest savings and need to be factored while making the decision. 

Lost tax benefits: In India, home loan borrowers can claim tax benefits under various sections of the Income Tax Act, such as deductions on the principal repayment and interest payment. Pre-closure may lead to a loss of these tax benefits.

Opportunity cost: Using a lump sum to pre-close a home loan could mean missing out on potential higher returns from alternative investments. It's essential to compare the interest saved with the potential returns from other investment options.

Liquidity impact: Channeling a significant amount towards pre-closure might deplete one's liquidity, affecting their ability to address emergencies or other financial needs.

Closing costs: Apart from prepayment charges, there might be administrative costs associated with closing the loan early. These can include processing fees, documentation charges, and more.

Prepaying home loan: How to make an informed decision

Before deciding whether to pre-close a home loan, borrowers should carefully evaluate their financial situation, goals, and the terms of their loan agreement, and they must bear in mind the prepayment charges, the tax implications, the investment opportunities, and the long-term financial goals. The borrower must consider all this and weigh how the pre-closure aligns with their overall financial goals and priorities.

Prepaying home loan: Preclosure fees

Banks charge preclosure fees in order to dissuade the borrower from prepaying or preclosing their housing loans. This is because by prepaying or preclosing, the borrower ends up repaying lesser to the bank or financial institution than if they finished the entire tenure of the loan. 

As per Bankbazaar.com data, some banks do not charge preclosure fees. These include —

State Bank of India (SBI), PNB Housing Finance Limited, HDFC Ltd, Indiabulls, Sundaram Home Finance Limited, Axis Bank, DBS Bank, Oriental Bank of Commerce, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, IDBI Bank, Central Bank of India, among others.

Prepaying home loan: Preclosure charges 

As per the portal, other banks that levy charge on preclosure include - 

a) Aditya Birla Housing Finance Limited — No charge for anything for individual borrowers, but levies 2 per cent of outstanding principal on non-individual borrowers.

b) LIC Housing Finance Limited — Charges up to 2 per cent of the prepaid loan amount.

c) Federal Bank — Charges up to 3 per cent of the outstanding balance