Home Loan Foreclosure Charges Levied By Banks in 2024

home loan foreclosure charges india

6 mins reading

Last updated on 11th April 2024

Home loans are a common route to homeownership, but the journey doesn't end at signing the loan agreement. This article unravels the often overlooked aspect of home loans - home loan foreclosure charges levied by banks. We'll explore why these charges exist, how they're calculated, and the impact they can have on your financial planning. From understanding RBI regulations to considering the pros and cons of early loan repayment, this article aims to provide a comprehensive guide to help you navigate the complexities of home loan foreclosure charges and make informed financial decisions.

Table of Contents

Home Loan Preclosure: Benefits and Advantages

Paying off a home loan before its scheduled end date is known as home loan foreclosure. Many people choose the preclosure of home loans for various reasons.

One of these reasons could be to secure the lowest interest rate for a housing loan from another bank. This is where the concept of refinancing comes into play. When you refinance, the new bank pays off your existing loan, and you begin a new loan with better terms. This is essentially a form of foreclosure since the original loan is being paid off before its scheduled end date. 

Refinancing is an attractive option for many borrowers because it can lead to significant savings over the life of the loan. For example, if the new bank offers a lower interest rate, the borrower could end up paying less in interest over the life of the loan, even when taking into account the costs of refinancing. This is why some borrowers might choose to foreclose their original loan and start a new one with a different bank.

However, it's important to note that foreclosure and refinancing are not the same thing, and each comes with its considerations and potential costs. For example, some banks might charge a penalty for foreclosure, and there are also costs associated with refinancing, such as application fees and closing costs. Therefore, it's important for borrowers to carefully consider their options and consult with a financial advisor before deciding to foreclose or refinance their home loan.

Importantly, one significant advantage of home loan foreclosure is reducing the interest burden and the overall cost of the property. In India, where the average home loan tenure is around 8 years, opting for prepayment can be beneficial. This approach is often taken when individuals receive an annual bonus or when their existing investments mature

Suggested read: Home Loan With Low Credit Score

Disadvantages of Pre-Closing a Home Loan

Pre-closing a home loan, which means paying off your mortgage before the agreed term ends, can sound like a great idea for financial freedom. However, it comes with its own set of demerits to consider:

  1. Prepayment Penalties: Some lenders charge a penalty for prepaying a loan, especially if it has a fixed interest rate. This penalty is designed to compensate the lender for the interest they lose when you pay off your loan early. The fees can sometimes be substantial, making prepayment less financially beneficial.
  2. Loss of Tax Benefits: In India, home loan repayments offer tax benefits under various sections of the Income Tax Act, such as Section 80C for principal repayment and Section 24 for interest payment. When you close your loan early, you lose out on these potential tax deductions, which could have been substantial savings over the years.
  3. Impact on Savings: If you're using a large portion of your savings to pay off your home loan early, you might be putting yourself at financial risk by not having enough emergency funds. It's crucial to maintain a balance between paying off debt and having enough saved up for unexpected expenses.
  4. Lost Investment Opportunities: The money used for prepaying the home loan could potentially earn more if invested elsewhere. Depending on the interest rates and market conditions, investments in equities, mutual funds, or other vehicles might yield higher returns than the interest saved by closing the mortgage early.
  5. Reduced Liquidity: Tying up your funds in a home can reduce your liquidity, meaning you have less cash available for immediate needs or other investment opportunities. This can be particularly problematic in times of financial crisis or if cash flow becomes an issue.

List of Home Loan Foreclosure Charges of Banks as of 2024

Lender Individual Borrowers Non-individual Borrowers
LIC Housing Finance Limited Nil to 2% Nil to 2%
Federal Bank Nil to 3% Nil to 3%
Dhanlaxmi Bank Nil As per the terms of the bank
Yes Bank Nil - For floating rates 4% of outstanding principal – for fixed rates
ICICI Bank Nil to 4% Nil to 4%
HDFC Bank Nil to 2% Nil to 2%
SBI Bank Nil to 3% Nil to 3%

Suggested read: Best home loan bank in India

Types of Home Loan Closures

There are various types of home loan closures such as:

  1. Preclosure: This is when you decide to pay off your entire home loan amount before the loan's intended tenure. It's like finishing the loan early, which can help you save on interest.
  2. Regular Closure: With regular closure, you stick to the original repayment schedule and pay off your home loan as agreed upon over the loan tenure.
  3. Inadequate Loan Closure: Sometimes, due to financial difficulties, a borrower may need help to repay a part of the loan. In such cases, banks may consider waiving some fees, but there could be consequences like compromising collateral or questioning the guarantor.
  4. Settled Loan Closure: If a borrower can't repay the entire loan amount, the lender may offer a discounted rate to settle the overdue portion of the loan, and the remaining amount may be waived off. This helps borrowers resolve their loans partially.

Factors to Consider During Home Loan Preclosure

Before you decide to foreclose your home loan, it's crucial to consider the potential drawbacks. 
  1. Early prepayment in the initial years can save you a lot of interest, so it's best to do it early.
  2. Think about what else you could do with the extra money – reducing other debts or investing for better returns.
  3. Consider your age and financial stability; if you're close to retirement or have uncertain income, prepaying might be a good idea, but if you're young and financially secure, think twice.
  4. Check your future financial needs; prepayment may not be ideal if it depletes your savings for other significant expenses.
  5. Remember that monthly EMI for home loan payments provides tax benefits, which you'll lose if you fully repay the loan. So, weigh the pros and cons carefully and choose what's best for your unique situation.
  6. Preclosing a loan means making a substantial one-time payment, which could put a strain on your finances and impact your lifestyle.
  7. Banks often impose home loan pre-closure charges, and if these fees are higher than the interest savings, it may not be financially prudent to proceed with pre-closure.

While preclosure can save on interest, evaluating the financial implications and how they may affect your daily expenses is essential.

Documents Required After Closing off a Housing Loan

Here are the essential documents you should collect after you've paid off your home loan to ensure everything is squared away:

  1. No Objection Certificate (NOC) or No Due Certificate (NDC): This is a must-have. It's a certificate from your lender stating that you've paid off your loan in full and there are no outstanding dues. This document proves that the lender has no legal right over the property anymore.
  2. Loan Closure Statement: This statement records all the transactions related to your loan, including the final payment. It's good to have this for your records to confirm that the account is closed and there are no pending charges.
  3. Original Documents: These include the title deed, mother deed, sale deed, and any other documents that were submitted to the lender when the loan was taken. Ensure you get all these original documents back in good condition.
  4. Encumbrance Certificate: Post loan closure, apply for an updated Encumbrance Certificate from the sub-registrar’s office. This certificate will show that the property is free from any legal dues and encumbrances post the repayment of the loan.
  5. Lien Termination: Check with the registrar's office if there was a lien on your property (meaning the bank had a legal right to keep possession of property belonging to another person until a debt owed by that person is discharged). If so, ensure that the lien is removed once the loan is paid off.
  6. Update in Credit Report: Although this is not a document, it's important to check your credit reports a few months after closing the loan to ensure that the loan closure is updated correctly, indicating you are debt-free regarding this loan.

Smooth Home Loan Preclosure

  1. When planning to close your home loan early, keep these essential points in mind for a hassle-free experience.
  2. First, ensure you collect your property documents from the bank and obtain a No Objection Certificate (NOC) to confirm all dues are cleared.
  3. Next, remember to update your credit score for better financial prospects in the future.
  4. Carry a valid ID for verification purposes and have your checkbook ready for the final settlement payment.
  5. Lastly, don't forget to obtain a payment acknowledgment from the bank as proof of successful loan closure.

By following these steps, you can confidently navigate the home loan pre-closure process

Suggested read: Pre-payment of Home Loan

Guidelines for Home Loan Preclosure

It's important to be aware that not all home loan providers enable online prepayment facilities. In such cases, borrowers may need to physically visit the bank or authorize a representative to make the prepayment.

Fortunately, there are typically no restrictions on authorizing someone else to carry out the prepayment, as long as the lending institution's prepayment rules are followed.

Before proceeding with foreclosure, individuals should carefully assess any prepayment charges imposed by the bank. In some instances, these charges may outweigh the interest savings, making it less financially beneficial to pre-close the loan.

Cracking the Code: Home Loan Prepayment Charges

Banks may charge a prepayment penalty to discourage early loan repayment and protect their interest income. However, if your loan has a floating interest rate, the RBI prohibits banks from levying such penalties. For fixed-rate loans, the penalty can be up to three percent.
If you prepay after six months, you can prepay up to 25% without penalties, but beyond that, a fee may apply.

Before prepaying, consider the impact on tax benefits, as prepayment may affect deductions on interest payments (up to Rs 2 lakh under section 24(b)) and principal repayment (up to Rs 1.5 lakh under section 80C).

Additionally, it's essential to prioritize prepayment in the early years to save more on interest. If you have other high-interest-rate loans, paying them off first could be more beneficial.

Zero Prepayment Charges: Borrower-Friendly Banks Offering Flexibility

Indiabulls, Sundaram Home Finance Limited, Axis Bank, DBS Bank, Gruh Finance Limited, Oriental Bank of Commerce, Canara Bank, Kotak Mahindra Bank, and Jammu & Kashmir Bank - All offer nil prepayment charges for both individual and non-individual borrowers.

In conclusion, understanding home loan foreclosure charges is essential for any borrower. Preclosing a home loan can provide various benefits, including saving on interest and reducing the overall cost of the property. However, borrowers must carefully weigh the pros and cons, considering factors such as financial stability, home loan tax benefits, and future monetary requirements. If opting for preclosure, ensuring a smooth process by following necessary guidelines and evaluating prepayment charges is crucial. Ultimately, making an informed decision will help borrowers navigate this financial aspect with confidence and achieve their homeownership goals effectively.

FAQs About Home Loan Prepayment Charges

Yes, banks can levy foreclosure charges on home loans, but as per RBI guidelines, no charges are to be levied on floating-rate term loans sanctioned to individual borrowers.

RBI guidelines state that banks will not levy foreclosure charges or prepayment penalties on home loans on a floating interest rate basis. 

You can avoid foreclosure charges by choosing a loan with a floating interest rate, as per RBI guidelines, or by negotiating with your bank.

Foreclosure of a home loan can save on the interest that would have been paid during the remaining loan tenure, but it doesn't reduce the interest rate.

The foreclosure amount is calculated as the sum of the outstanding principal amount, accrued interest, and any applicable charges.

Benefits include saving on interest payments, improving credit scores, and reducing financial burdens.

Foreclosure refers to repaying the entire loan amount in one go, while prepayment pays off part of the loan in advance.

Yes, prepayment of home loans can reduce EMIs as it reduces the outstanding principal amount, leading to a smaller loan balance and, therefore, potentially lower monthly EMIs.

Published on 27th July 2023