Prepayment of Home Loans – Norms, Charges & Other Details!

Last Updated : June 13, 2020, 1:53 p.m.

A home loan, which is usually taken for as long as 20-30 years, can have massive interest obligations for a borrower to fulfill. But the obligation can be reduced to an extent if you use the prepayment facility that banks and housing finance companies (HFCs) offer to borrowers.

Lenders provide the prepayment facility to the borrowers with which they can make part or full payment of their loan amount before the fixed tenure chosen by them. This helps borrowers in reducing both the interest and principal outstanding amount over the tenure.

In this article, we will be telling you everything related to the Prepayment of Home Loan — what is a prepayment facility, how much money you can save by this, and about the prepayment facilities of the top home loan lenders. Keep reading to know more!

Let’s Know about Prepayment Facility in Detail!

As we told you how home loans are usually taken for a longer period of time and when an individual opts for a home loan, the repayment is done via Equated Monthly Installments (EMI). This EMI amount consists of a part of the principal amount and interest amount. So on choosing a longer tenure, the interest amount will be higher accordingly.

So when an individual decides to save the interest amount over the loan tenure and reduce the overall loan burden, the facility that an individual opts is known as Prepayment Facility. With this, a person can pay an additional amount of principal over and above your regular EMI amount at different points in your tenure. When this is done in small parts, it is known as Part-prepayment Facility. So, when an individual pays some additional amount anytime during the course of the loan, the principal outstanding amount will automatically decrease, and by virtue of that, your EMI or loan tenure can also be reduced.

While opting for the prepayment of home loan, it is important to consider the charges on the prepayment facility. Lenders don’t charge on prepayment if the home loan is taken on a floating rate of interest, but if the loan is taken on a fixed rate of interest and the borrower wants to prepay the loan via refinancing (taking another loan) then the charges usually range from 2% to 3% of the amount being prepaid. However, there are no charges if the borrower is using his or her own funds to prepay.

There is one more thing that you need to know that it is best to make a prepayment of your home loan in the initial years of the tenure. Why? Because the interest amount tends to be on a higher side during these years and gradually come down as the years pass by. So, to save on the interest amount, it would be better if an individual prepays the home loan in the initial years.

Impact of Prepayment of Home Loan on your EMI amount and Loan Tenure

It would be better to understand the impact of the prepayment facility via an example as that will help you decide better whether to go for it or not. We are providing the same below. Have a look.

Suppose an individual has a home loan of INR 45 lakh at a floating interest rate of 7.75% per annum for a tenure of 18 years. So, according to these details, the EMI amount will be INR 38,696. Some of the other important details are given in the below table. Have a glance at them!

Now, after paying all the EMIs on time for the last 60 months (5 years), the applicant wants to make a part prepayment of INR 5 lakh to reduce his principal outstanding amount.

At the end of 5 years, the principal outstanding amount is INR 37,96,777.

After paying the prepayment of INR 5 lakh, the new balance will be INR 32, 96,777.

Some of the other important details after making the prepayment are in the below table. Don’t forget to check them!

So, you can see that after making the prepayment of a home loan, your EMI will be reduced to INR 33,600 which is around INR 5,000 less than before.

Other than that, the interest amount will also be reduced to INR 19,44,794 and you can make an overall savings of INR 2,94,955.

Other than reducing your EMI amount, you can also reduce your tenure by paying the same EMI amount for your remaining loan amount. If you do so, you will be able to pay the loan amount way before your fixed tenure. Let’s understand this via an example.

After making the prepayment of home loan (INR 5 lakh), your new outstanding balance will be INR 32,96,777. The remaining tenure at this point is 13 years. If you keep paying the EMI amount the same as before (INR 38,696) then the tenure can be reduced.

So, you will be able to pay the loan amount around (32,96,777) in 124 months which is 10 years and 4 months.

So, you can see how you can pay the same loan amount in (10.4+5) 15 years and 4 months which you were supposed to pay earlier in 18 years. So, you are supposed to pay an interest of INR 15,04,513 over 10 years and 4 months. The interest amount is INR 4,40,281 lesser than when you pay the reduced EMI and continue the loan for 13 years after the part-prepayment.

Also, you are allowed to make as many part prepayments as possible if you like to reduce your EMI amount or tenure further.

Prepayment Process of Top Home Loan Lenders

Home loan lenders provide a prepayment facility to all the borrowers. For someone who is looking to opt for a home loan or having a home loan, it is important to know about the prepayment process. So we will be telling you about the prepayment processes of some of the top home loan lenders such as State Bank of India, Bank of Baroda, HDFC Limited, ICICI Bank, LIC Housing Finance Limited, etc. Don’t forget to glance at them!

HDFC Limited Home Loan Prepayment Process

Being one of the top home loan providers of the country, HDFC Limited provides a seamless prepayment facility to both individuals and non-individuals on their home loan taken at both floating and a fixed rate of interest. You can have more knowledge about it below.

Prepayment of Floating Rate Home Loans

If you are an individual who has opted for a home loan on the floating rate on interest and want to prepay the loan amount (partial or full) before the tenure, you don’t need to pay prepayment charges for the same. This prepayment can be done from any of the sources.

Non-individual Borrowers such as Companies, Sole Proprietorship Concerns/Firms, or Hindu Undivided Families will need to pay prepayment charges as follows.

• If prepayment is done within the first 6 months of the date of disbursement, non-individuals will need to pay 2% of the prepaid amount plus applicable GST charges.
• If the prepayment is done after 6 months and upto 36 months of the date of loan disbursement, non-individuals can only prepay upto 25% of the opening principal outstanding amount each year. Suppose the opening principal amount at the start of the second year is INR 8 lakh, you can only prepay INR 2 lakh without any extra charges.
• Prepayment charges of 2% of the prepaid amount plus applicable GST charges will be levied on the borrowers if they prepay more than 25% of the opening principal outstanding amount every financial year.
• There will be no charges if the prepayment is done after 36 months of the loan disbursement and the payment is not done via refinancing (another loan). Borrowers must be making this prepayment from their own sources.

Prepayment of Fixed Rate Home Loans

HDFC Ltd also provided the home loan on the fixed rate of interest that means your interest rates will be fixed for your overall tenure. Conditions for the prepayment charge changes in the Fixed Interest Home Loan. You can look at them below.

Individuals who opted for a Fixed Rate Home Loan and want to prepay the loan amount (partial or full) from refinancing (loan from Bank/NBFC/HFC) and not from their own sources then the prepayment charges will be 2% of the paid amount plus applicable GST charges.

Non-individual Borrowers such as Companies, Sole Proprietorship Concerns/Firms, or Hindu Undivided Families will need to pay prepayment charges as follows.

• If a non-individual wants to make the prepayment within the first 6 months of the date of disbursement, they will need to pay 2% of the prepaid amount plus applicable GST charges.
• But if the prepayment is done after the period of 6 months and up to 36 months of the date of loan disbursement, non-individuals can only prepay upto 25% of the opening principal outstanding amount each year. Suppose the opening principal balance at the start of the second year is INR 10 lakh. You can only prepay INR 2.5 lakh without paying any extra charges.
• Prepayment charges at 2% of the prepaid amount plus applicable GST charges will be levied on the borrowers if they prepay the more than 25% of the opening principal outstanding amount every financial year. So, suppose you want to pay INR 4 lakh before the fixed tenure, then you will be paying 2% of INR 4 lakh plus applicable GST charges.
• There will be no prepayment charges if the prepayment is done after 36 months of the loan disbursement and the payment is not done via refinancing (another loan). Borrowers must be paying this prepayment amount from their own sources to avail this facility at zero charges.

ICICI Bank Home Loan Prepayment Process

ICICI Bank is also one of those top private banks of India that provides a seamless home loan facility to the customers. Available at affordable interest rates ranging from 9.00% - 10.05% per annum, the loan facility can be availed by both salaried and self-employed individuals. If you are having an ICICI Home Loan and want to prepay some amount before the tenure to reduce the burden, you can do without paying any charges if your home loan is at a floating interest rate. Otherwise, you would need to pay 2% of the principal outstanding amount plus applicable GST charges on the full prepayment of the home loan. So, you can easily decide whether to prepay your home loan or not.

State Bank of India (SBI) Home Loan Prepayment Process

With the freedom of choosing a suitable home loan scheme from several schemes, State Bank of India (SBI) is the leading public sector bank of India. Some of the reasons due to which so many people opt for this are the affordable interest rates ranging from 9.15% - 11.30% per annum, flexible tenure and easy repayment methods.

State Bank of India also charges no penalties on prepaying the loan amount before the fixed tenure so that the applicant can reduce his/her overall interest outgo and ease the loan burden. Any individual who is currently paying the SBI home loan can make the part or full prepayment according to capacity.

Bank of Baroda Home Loan Prepayment Process

After the recent merger of Dena Bank and Vijaya Bank with it, Bank of Baroda has emerged out as one of the top five public banks of India. Everybody wants to have lower interest rates on their home loan and ranging from 8.50% - 10.60% per annum, Bank of Baroda home loan interest rates suit many customers. The final rate of interest will be decided according to the credit score of the borrower.

Borrowers can opt for a prepayment facility without paying any extra charges. Any borrower can pay in part or full payment of the loan amount before the fixed tenure if the loan is taken on floating interest rates.

LIC HFL Home Loan Prepayment Process

If you have taken a home loan from LIC Housing Finance at floating interest rates ranging from 8.50% - 10.75% per annum and want to pay some loan amount before the tenure, you can easily do it without paying any extra charges. However, borrowers with a fixed rate of interest home loan will need to pay 2% of the principal outstanding amount plus applicable GST as prepayment charges if they are not paying the loan amount from their own sources. If you are prepaying the amount by refinancing, you will need to pay the charges.

Tata Capital Home Loan Repayment Process

Tata Capital is also one of the finest lenders of our country that provides a home loan to the borrowers. Its affordable interest rates ranging from 8.95% - 12.00% per annum make it favorable for many people who want to opt for a home loan at lower EMIs. If at any point in your tenure, you want to prepay your home loan either in part or full, you can do it without paying any penalty charges on it. The only condition that you need to adhere to is that you must pay the amount from your own funds and not from other means else you will need to pay prepayment charges for it. So, you can decide accordingly.

Things to Consider Before Prepayment of a Home Loan

Now you have enough knowledge about what exactly is a prepayment of home loan, how does it impact your EMI & interest outgo, and the overall process, you can look at some of the points that you need to consider before prepaying your home loan. All of them are mentioned below at which you must have a look!

• The first thing that you need to consider if you will have enough funds for your financial goals (marriage, travel, etc) or some unforeseen emergency after paying the prepayment amount. Because it would not be a wise decision to prepay the loan with the only extra funds you have at your disposal and leave yourself.
• Before prepaying your home loan, you should check if you have any other loan at higher interest rates such as Personal Loan, Education Loan, Gold Loan, or any other. If there is another loan, you should always pay off that loan first with the amount you were going to use for the prepayment of the home loan. The reason is pretty simple as those loans will cost you more interest as compared to a home loan which is a secured loan. If there is some amount left after paying off that loan then you can prepay the home loan.
• You can use the prepayment amount in some investment that can give you higher returns over the period. But you should check if the return amount is more than the savings you will make on the home loan interest amount by prepaying. You should check the possible return of your investment, and make the decision accordingly.
• You should always prepay your home loan in the initial years of your loan tenure as you will pay much less interest on the reduced principal amount after prepaying some of it which will ultimately reduce your EMI amount.