Know more about Home Loans Pre-Payment

Introduction

This particular post (Know more about Home Loans Pre-Payment) is to specifically make my readers aware of various key terms and rules concerning home loan and home loan prepayment. The next post tomorrow (How to decide whether to Pre-Pay your Home Loan) would talk in detail about how to take a decision whether to pre-pay the home loan or not?

What is a Home Loan

A home loan is a useful financial vehicle that gives birth to many a middle class dream. Home loans are one of the biggest commitments from common man’s perspective. With long tenures these loans, sometimes outlive the individual.

What is prepayment of Home Loan

There is one option through which an individual can bade adieu to his loan and become the complete owner of his/her house. Loan prepayment is an option where the person pays a sum higher than his regular installments to reduce the principal amount of his loan. If the prepayment amount is high enough it can also reduce the tenure of the loan.

What is prepayment penalty

Many banks would charge you a loan prepayment penalty if you decide to pay a sum of amount to the bank that is more than your Equated Monthly Installments (EMIs). This always sounded very strange to me - one, i pay more money to the bank and second, i am penalized for the same. Well, banks may have their own reason to do so - including the fact that they lose out on a portion of the interest they were supposed to earn.

Does pre-payment penalty still exists?

Partially, yes. Pre-payment penalty has been abolished on specific types of loans. Several factors contributed to the prepayment penalty being abolished, with concerns regarding the various practices by banks being the primary factor. While old customer was charged higher interest rates, the new customers were lured often, with lower rates. This meant loyal and old customers were punished with higher rates. Abolishing prepayment penalty meant, the old customers could move to other banks and enjoy lower interest rates.

Fundamental Rules regarding Pre-payment penalty

1) On 9th October 2011, the NHB (National Housing Board) had given a directive to scrap penalty on pre-payment of housing loans. All the 54 housing finance companies had to abide by the directive.

2) The pre-payment penalty is abolished for floating interest rate loans only. This enables the borrower to either prepay his loan or move his loan to other housing finance company that offers better terms by refinancing the old loan.

3) The pre-payment penalty on fixed interest rate loan is not abolished. However, if pre-payment is done with own sources, then the penalty is not levied. "Own sources" here refers to other than borrowing from a bank or a financial institution.

The book "From Rat Race to Financial Freedom" would talk in detail about Home Loans and how to effectively invest in real estate to speed up your goal of financial freedom.

Cheers

Manoj Arora