How does prepayment of home loan works?

While taking home loans we come across new terms such as prepayment, foreclosure, loan disbursement etc. Let me explain what home loan prepayment is and how it works. At times, banks and RBI change the guidelines and the interest rates drop but it's not that easy to opt for a loan with lower interest rate after applying for it and paying interest for months. But this doesn't mean that opting for a home loan with a lower interest rate is impossible. So, this is where we come across the term prepayment of home loan.

To opt for a loan with lower interest rate and flexible facilities you can prepay the loan you are already paying interest for. In simple words, paying loans early with the surplus cash you have with you. With prepayment of home loan, you can reduce your EMI and at the same time reduce your tenure. 

Generally, the prepayment amount is a minimum of three times that of the existing home EMI. At times, you may need to pay a penalty fee for prepayment of home loan.

How does prepayment of home loan works?

The RBI and NHB have come with some rules and regulations for the prepayment of home loans. These guidelines will help you understand how prepayment of home loan works.

• A financial institution cannot charge a penalty fee more than the amount stated in the loan agreement.

• Banks can only levy penalty fees at fixed rates.

• HFCs can charge a penalty fee if the borrower is paying the loan by taking another loan from HFC or another bank. If you repay the loan without taking any other loan you don't have to pay any penalty fee.

• Banks cannot charge a penalty fee if the loan comes down to a floating rate.

I hope you understand how the prepayment of home loan works.

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