Generally, Home loan is offered for long tenure and a larger amount. It is a huge financial burden for the borrower and if it is not planned appropriately, it will lead to great financial burden and debt. Repayment plan of the home loan can lead to financial benefits to the borrower by reducing the interest rate burden thus the overall cost.
In India, the approximate tenure of the home loan is around 10-15 years. Home loan prepayment is often preferred by the home loan borrowers to get rid of the huge home loan burden quickly. Though the home loan foreclosure is beneficial for the borrower, but it is a financial loss to the home loan provider or lender. This is one of the main reason why banks discourage the prepayment. One of the most popular & common way to discourage or refuse to accept prepayment by the bank is by rejecting the foreclosure application, if the person does not visit the branch physically. A majority of the home loan providers do not enable the facility of the online prepayment of housing loan. However, if the person is genuinely unable to be physically present, then his or her representative can visit the branch with letter of authorization and proceed with the home loan prepayment process on behalf of the borrower.
Often the borrowers go through the dilemma of either prepaying the loan amount or to invest the extra money in other options. Such dilemmas are usually encountered when the borrower receives any bonus or increment in their salary. In such cases, the borrower should carefully evaluate the prepayment penalties and then take a call. The borrower should check all the options with respect to rate of return for both, the investment or for prepayment. Home loan foreclosure or home loan prepayment would save on an average around 8-10% returns in majority of the cases.
When the borrower opts for the prepayment of the home loan, it automatically reduces the total interest rate outflow. There are many home loan borrowers who feel confused in either reducing EMI or to reduce the home loan tenure. The most sensible and long term effective decision would be to reduce the tenure of the home loan. If there are any increment in the person’s salary or income, he can then increase the monthly installment repayment amount. This shall lead to prepaying the home loan in a more steady manner. If suitable, the customer can even plan to pay extra EMIs. Most of the policy allows one extra EMI payment by the borrower in a year. If the borrower can combine both the option – increment in EMI amount and paying off one extra EMI, then planning of the home loan prepayment can be fixed accordingly.
Before going in for a foreclosure, certain things needs to be looked into.
1. The borrower will have to submit important documents such as ID proofs.
2. The acknowledgement slip confirming the payment done should be collected, this would consist of the outstanding amount after prepayment and also the tenure of the balance home loan and new monthly installments. The acknowledgement must be signed and stamped by the authorities of the bank or the lender.
3. If monthly installments were debited through post-dated cheques, then fresh cheques should be issued with the revised amount for the EMI.
4. The borrower should collect the unused cheques back in order to avoid it’s misuse.
5. At times banks might insist on checking the source of funds to be used for the home loan prepayment. Hence, the borrower should carry and submit the bank statement for the past 6 months with which, the borrower is prepaying the home loan.
6. It’s important that the borrower ensures that all the prepayment details are updated in his CIBIL.