Want To Do Home Loan Prepayment Know These Charges And RBI Rules
Most people resort to home loans to buy their dream house and home loans come with a huge interest rate with a tenure of 20-30 years. To reduce the total interest which is paid throughout the tenure can be reduced by home loan prepayment. Prepayment is a facility which is offered by many banks which helps a borrower to repay their loan before the tenure gets over, it can be done partially or fully. The prepayment is done as per the loan documents which are signed at the time loan is availed. It should be noted that the prepayment facility is chargeable. Banks charge some amount as there is a loss of interest inflow for them. Before you make a prepayment, you should know that the pre-payment amount must be at least three times your existing home loan EMI. Usually, the bank charges a fee ranging from 2 percent to 5 percent of the unpaid principal amount as prepayment charges. If a borrower has borrowed the loan on floating interest charges then they are generally exempted from prepayment charges.
Home loan prepayments can be done in two ways:-
- Loan payment in part
- Total advance repayment
Part-payment can help a borrower reduce the EMI amount while the tenure period is kept the same or overall interest outgo is reduced because tenure gets reduced.
RBI, the Central Bank of India, frames the policies for lending and deposits in India apart from carrying out other important functions. It has also laid out some rules for bank regarding the prepayment of home loan to ensure that borrowers can effectively use this facility.
All home loan borrowers are eligible for prepayment of home loan, only if the bank offers this facility. A borrower should clearly check if the bank has this facility, if yes, then he/she should read the terms and conditions clearly.
RBI rules related to the prepayment of home loan
● Home Loans With Floating Rates
Floating rates are a type of interest rate where the interest rate keeps getting changed according to the market condition. Now that interest rates keep fluctuating so does the EMI cost due to this reason the banks do not charge any fees or penalty from the customers who have taken a loan on the floating interest rate on prepayment of the loan. No charges are levied if a customer makes the payment in full or partially. If a borrower thinks that he can make the prepayment of the loan then he/she should take a loan on the floating interest rate to avoid the prepayment charges.
● Fixed-Rate Home Loan
If a borrower has is paying a fixed rate with his own funds then banks or NBCFs cannot levy any prepayment charges. Borrowers must accumulate the funds from their own sources to avoid such charges. If the funds are borrowed from any other financial institutions then a borrower will be charged with a prepayment penalty.
● Dual Rate Home Loan
As per the RBI guideline, no fees or penalty is charged on prepayment if you have borrowed a dual-rate loan. Dual rate loan is a type of loan in which for the first few years the interest rate is fixed and then it turns into floating rate home loan. If the interest rate is still under fixed and you make a prepayment then you will be charged a penalty for the same.
● Loans For Non-Individuals
If a borrower has availed non-individual loan then bank or NBCFs cannot charge prepayment penalty irrespective of what type of interest rate they have opted for. Non-individual loans are sanctioned to company or guarantor as a co-borrowers or trust entities such as a trust, company or guarantor as the co-borrower.
Prepayment might not always be the best option. It will turn out to be fruitful if you don’t have to pay the penalty for prepayment. Surely, prepayment can save you so much money. When you apply for a home loan it is advised to clearly read the terms and condition and also check whether the home loan adheres to the given RBI guidelines. If you find any difference between the two then it should be brought in the notice of your bank, to ignore the misunderstanding later.