What You Need to Know About Home Loan Foreclosure?

A home loan is a boon for people looking to buy a house, but a loan can be a burden on the mind.  Can I foreclose my home loan, or when can I foreclose home loan - are questions that may pop up in your mind.

Sometimes, borrowers choose to foreclose a home loan and free themselves from the monthly EMI tension, and have peace of mind. In this article, we will discuss what is foreclosure of home loan, what are the implications of home loan foreclosure, what are the foreclosure charges on home loan RBI guidelines, how a foreclosure on a home loan is calculated and what are the advantages and disadvantages of foreclosing a home loan.

What is Foreclosure of Home Loan?

Can I foreclose my home loan? Yes. You can. Foreclosure is an option where the borrower repays the entire home loan through a single payment. As to when you can foreclose the home loan,most banks allow foreclosure any time after the disbursement of the loan.

How Does Home Loan Foreclosure Work?

Home Loan  Foreclosure Charges

Prior to April 2012, lenders used to levy home loan foreclosure charges of 5%. Foreclosure charges on home loan RBI guidelines mandate  that borrowers should not be made to pay any home loan foreclosure charges. 

As such,most lenders do not levy any foreclosure charges on floating interest rate home loan.  A home loan taken on a fixed interest rate, however, usually attracts home loan foreclosure charges (usually 1% to 5%), unless there was a deal to exempt it at the time of giving the loan.

Home Loan Foreclosure Calculator

Much before you approach the bank, you can also get an idea about how to proceed or how much you need to pay, if you check the website of the bank that you took the home loan from. You can use the home loan foreclosure calculator on the website. You may also find guidance as to how the  foreclosure on a home loan is  calculated.

Foreclose Application & Bank Acceptance

In case you want to go for a home loan foreclosure, give an application to the bank stating your request to foreclose the home loan. Mention your home loan account number in the application, and a copy of your PAN, and address proof.  The bank will subsequently approve your request, and calculate how much outstanding loan amount you need to pay, by taking into consideration the EMIs and the interest paid till that point. If it is a fixed rate home loan, the home loan foreclosure charges as applicable will be added to the payable outstanding amount.

Returning Your Documents

Subsequent to the payment of the outstanding amount, the bank will close the home loan account, stop the EMI payment instructions and return the property deed and related documents to the borrower. Also remember to take a “No Dues Certificate” from the bank stating that there is no outstanding amount pending. This certificate should contain the name of the property holder and the address of the property

Advantages of Foreclosing a Home Loan

  • If you have sufficient funds such that you can choose to go for home loan foreclosure, then you can save a substantial amount on the interest component. 
  • Of course, you can have the peace of mind that comes with having cleared all your debts. You don’t have to keep track of monthly EMI payments and all the headache associated with it.
  • You can take advantage of bank offers to take over your home loan at lower interest rates - this is called home loan balance transfer. As such, you can foreclose the home loan and transfer to another lender. This can help you reduce the overall tenure of the loan, apart from availing lower interest rates.

Disadvantages of Foreclosing a Home Loan

  • If you foreclose a home loan, you will not get the benefit of tax deductions under various sections. (link to 5 Important Facts On Home Loan Tax Benefits In India)
  • If you are foreclosing the home loan from your savings, it will drain into your bank balance and leave you short of funds for any emergencies or other expenditures.
  • You may have to pay home loan foreclosure charges, but then overall it could be beneficial.

Should You Foreclose a Home Loan

Again, it is a tricky question as to whether you should foreclose a home loan or not.  It all depends on your individual situation and priorities. If you are the type who prefers peace of mind, then maybe, foreclosure of home loan is a good decision if you can afford it.

But if your main objective behind taking a home loan was to save on income tax, then probably you should continue paying EMI to full term, rather than thinking of foreclosing the home loan.

It could also be the case that you wish to buy a second home with another loan, and in the situation you may have some benefit in closing the first loan.

Also,as mentioned before, you can think of foreclosing a home loan, if you have a balance transfer offer from another bank for a lower interest rate.

Overall, avoid paying from your savings, as you may need money for other purposes. Apart from that, compare the interest amount that you are paying with the tax saving that you are getting, and go for a foreclosure only if it is overall beneficial for you.

Difference between Prepayment & Foreclosure of Home Loan

While we are on the topic of foreclosure of home loans, it is important to not confuse it with another idea called “prepayment”.  

Prepayment is an option where you can pay part of the principal amount, so that you can reduce the EMI, the interest component and/or the payment tenure.

While prepayment is only partial payment of the loan amount, and does not result in closure of the loan account, a foreclosure of home loan is an outright closure with complete repayment, that results in release of your original documents.

How Does Foreclosure of Home Loan Effect Your CIBIL Score?

Another important point to consider is how will foreclosing a home loan impact your credit-worthiness in the market in the future. A CIBIL score of 750 and above is usually considered good by lenders to assess your credit-worthiness when you apply for a loan. 

Once you foreclose a home loan, the lending bank will share the information with other banking and financial institutions. Foreclosing a home loan can bring down your CIBIL score drastically, to such a point that is not considered as a good CIBIL score. It may thus impact your prospects of getting a bank loan in the future. But if you think that you may not need or you may not apply for any loans in the future, then this should not be a point to worry about.