Understanding Prepayment

As a borrower, the easiest way to understand Home Loan Prepayment is to look at it as an early repayment of the Home Loan. This repayment can be done for the full amount or even done in parts. This action is taken in order to avail lower interest rates for the remaining loan tenure. But the question remains, whether it is wiser to invest the money somewhere else or to use your funds for the early repayment of the loan? What is the better option?

As per new rules provided by Reserve bank of India, banks are forbidden from charging any sort of Prepayment Penalty whatsoever on Floating Rate Home Loans. This has come as a respite to Home Loan Borrowers and is a huge leap forward for consumer/borrower welfare. If your bank is charging for any Pre-payment penalty, you are eligible to lodge a complaint with the Consumer Forum of India and the Banking Ombudsman.

Why Is Home Loan Prepayment Required?

Home Loan Prepayment makes sense because it takes away a lot of principal loaned amount, thereby reducing the over all interest that has to be paid over the tenure of the loan.

Most borrowers prefer to prepay their Home Loan in order to reduce the level of debt as soon as they get a big chunk of money in the form of salary appreciation, annual bonus or return from investments.

However, there are many instances where continuing with Home Loan is the better option and much more financially beneficial. So the question remains:

When Should One Opt For Home Loan Prepayment?

A customer can save a lot of money by going for prepayment of their Home Loan. If your Loan is based on a Floating Interest rate, you will save money on Prepayment Penalties as well. If you are in possession of idle cash, deposits in the savings account or even in a fixed deposit, the better option would be to prepay the Home Loan.

When Is Prepayments Not The Right Choice?

If the Home Loan is not an absolute burden, it is far more beneficial in certain scenarios to continue with your regular EMIs and invest the money in better investment options. At the same time, Home Loans offer tax benefits under Section 80C. In such cases, the sensible choice would be to invest rather than prepay the Home Loan, because the profits from the prepayment far out perform the interest saved from prepaying the Home Loan.

Things to Do when going for Home Loan Prepayment

1. Always carry all your documents. It includes but is not limited to an ID Proof such as a PAN card, and also your cheque book. Also, keep a hands-on track of the bank statement which contains the Home Loan EMIs.
2. Always calculate exactly what you are going to save with the prepayment process. Take into account that Home Loan EMIs provide tax benefits. It is important to know which choice is more profitable.
3. It is recommended to invest the funds rather than using it for prepayment. So unless it is certainly more profitable to prepay, one should always consider high return investment such as Mutual Funds.
4. A signed acknowledgment letter, clearly stating that the borrower has paid a certain amount as prepayment should be procured and maintained.

How Does The Prepayment Process Works?

1. The first thing to do is inform your existing Home Loan Provider. You will under go a verification and perform a full & final payment. Carry all your documents that were involved in the Home Loan process. Sometimes the bank might even inquire about the source of funds being used for the Prepayment.
2. You will receive an acknowledgment of payment. This acknowledgment letter should be signed and stamped by an authorized personnel. You should also procure a No-Objection-Certificate (NOC), stating that henceforth, the lender has no interest in the property.
3. Withdraw and collect all the documents that you submitted. Make sure that even before you sign the acknowledgment form, all your returned documents are correct and in order.
4. After the Home Loan is prepaid, the financial transaction should be reflected in the Encumbrance Certificate. Apply for a new EC in the Registrar Office after the Home Loan Provider has given you the NOC. Once this process is performed, the home loan closure is finished.

One thing that most Home Loan Borrowers lack is in the homework and the access to correct information. This becomes even more pronounced if you are a first time Home Loan Applicant. Use Chqbook's exhaustive resources to not only calculate your EMIs, but also read and research about different aspects of Home Loan process. After all, that's how one becomes a smart borrower.