Factors You Need to Consider Before Foreclosing Your Home Loan

What is Foreclosure?

Foreclosure of a loan means paying the full due amount in a single payment instead of repaying in multiple EMIs. It is important you understand the pros and cons of foreclosing your loan and the correct timing before you proceed with the payment.

Individual borrowers with a floating interest rate Home Loan can consider a cost-benefit analysis at any given time, since they do not pay any extra charges on foreclosure.

Things You Need to Know Before Foreclosing Your Home Loan

Earlier, lenders would apply a prepayment or foreclosure penalty/charge for borrowers repaying before their repayment schedule. This could affect some borrowers adversely since they could not repay the sum owed even if they had surplus funds

However, in a customer-first move, the RBI mandated all charges on prepayment and foreclosure to be dropped if the borrower is an individual with a floating interest rate loan. Do note that those with a fixed interest rate loan are still subject to prepayment/foreclosure charges.  The exact charge varies from lender to lender. Individuals must consider these charges and others before they opt for a Home Loan foreclosure.

Weigh Tax Benefits

Availing of a Home Loan can help you enjoy tax benefits, given that you fulfill the eligibility parameters. Section 24 and Section 80C of the Income Tax Act allows tax deductions, concerning the repayment of interest and principal, respectively.  Foreclosure of a Home Loan would mean leaving behind all these benefits. Therefore, it would be wise to first map out one’s taxable income and see if there is a possibility of claiming savings under the mentioned ITA sections.

Also Read: Know About Tax Savings When Availing a Home Loan 

Calculate Expenses in Advance

One should keep track of all short-term and long-term expenditures before opting for a Home Loan foreclosure. These may include a retirement plan, children’s education, emergency contingencies, etc.The foreclosure of a Home Loan should only be considered if the borrower has sufficient savings to fulfil these requirements. 

Time Your Foreclosure

Choosing the right time to foreclose your Home Loan is a crucial factor to consider. If you foreclose your Home Loan at an earlier stage of your repayment tenor, you stand to save on the interest accumulation on the principal. At a later stage of your repayment tenor, you are left with only your principal loan amount and foreclosure could mean missing out on Income Tax benefits.

Evaluate Investment Avenues

Borrowers should also consider if foreclosing their Home Loans is the best use of the surplus funds that they have in hand. Instead of using the money to foreclose a loan, an individual can invest the same. To decide which option is more lucrative, evaluate the projected returns from investment and compare it to the interest outflow you save by foreclosing your loan.

Also Read: Home Loan Fees and Charges Guide

How to Foreclose a Home Loan

Inform Your Existing Lender

The process for a Home Loan foreclosure cannot be done online. Borrowers have to send a formal notice or a letter to their lender initiate the foreclosure procedure.

Repay the Outstanding Loan Balance

After receiving your request to foreclose the Home Loan, your lender will notify you of the total repayment amount due. Once the payment is complete and confirmed by your lender, you will receive your property documents from in their custody.

Get an NOC

Getting a No Objection Certificate from your existing lender is crucial, as it states that a full payment has been made and that you do not have any outstanding balance against your name.

Additional Read: Home Loan Terminologies You Must be Aware Of