2 min read
25 May 2021

Following the RBI mandate in April 2012, lenders have stopped charging foreclosure fees to borrowers who have a home loan on a floating rate of interest. Earlier, foreclosure charges included a hefty 5% or more of the principal outstanding, which made repaying your home loan earlier than your chosen tenor quite expensive. So, if you are thinking of early repayment of your home loan because that these charges no longer exist, stop to consider if the move is right for you.

Also, remember that if you have a home loan at a fixed rate of interest, you may be charged around 4% on the outstanding principal if you choose to foreclose your loan. In such situations, you may want to carry out a home loan balance transfer with lenders like Bajaj Finserv, who offer perks like a lower interest rate and the availability of a top-up loan.

So, with options like a balance transfer, you may be considering foreclosure if you have matured savings or a sudden inflow of cash due to the sale of an asset. However, before you decide, keep the following factors in mind to check whether foreclosing your home loan is the right option for you.

1. Weigh tax benefits before you foreclose

Your home loan allows you to claim certain deductions under Section 80C and 24 owing to the principal and interest repayment, respectively. Foreclosing the loan ahead of its tenor will mean letting go of these deductions. So, work out your taxable income and see if you can claim other savings under various sections of the IT Act in the absence of a home loan. If you can reduce your taxable income in other ways, you can consider foreclosing on your home loan.

2. Check whether your EMIs leave room for savings

Your income is usually used to meet your everyday expenses and fulfill your obligations. Keep some of it aside for savings and investments to secure your future and build wealth in your monthly budgeting. Ensure that your home loan EMI is not more than 40% of your monthly income. Use a Home Loan EMI Calculator on lender websites such as Bajaj Finserv to decide on a budget-friendly EMI from the start of taking a home loan. Choosing EMIs lower than your financial capacity will help you save a hefty sum every month. If you find that your EMIs are taking up most of your income, not leaving room for savings, you can consider foreclosure if you have the funds ready for it.

3. Calculate your expenses in advance to see if foreclosing is ideal

List out all essential long-term and short-term financial expenses such as your retirement, your children’s education, and your family’s healthcare funds, corpus for emergency contingencies, wedding-related costs, etc. Then, consider a foreclosure only when you have enough savings to fulfill these concerns.

4. Time your foreclosure to benefit you the most

If you have a foreclosure on your mind, doing the math is essential. Planning will help you save for foreclosure or know what to do with surplus funds when you have them instead of making a rash decision. The best thing to do is use the Home Loan Repayment Calculator (also known as a home loan foreclosure calculator) to check what you stand to save when you foreclose your loan.

5. Judge whether the extra funds need to be invested instead

You can use handy cash or surplus funds to start an investment or to foreclose your home loan. To decide what is more lucrative, factor in the projected returns from investing this surplus money versus your total interest outflow on your home loan during the same timeframe. Choose to foreclose early if interest obligations weigh more than your investment earnings. You may also want to when you are almost nearing your retirement but still have a long tenor left ahead of you.

Foreclosing your home loan may seem like a lucrative idea as you will be able to free yourself of the long-term obligation sooner than expected and end up paying less as interest too. However, keep the above points in mind before proceeding with foreclosure to best use your surplus funds.

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Frequently asked questions

Is it a good idea to foreclose home loans?

Foreclosing home loans can be a good idea in some cases. It can help you save on interest payments and become debt-free faster. However, it is essential to consider factors like prepayment penalties, your financial situation, and investment opportunities before deciding. Consulting with a financial advisor can provide personalised guidance.

What are the benefits of foreclosing a loan?

Foreclosing a loan can offer several benefits, including:

  1. Interest savings: Paying off your loan early reduces the total interest you'll pay overtime, saving you money.
  2. Debt freedom: Clearing the loan means you are debt-free, providing financial peace of mind and improving your creditworthiness.
  3. Improved cash flow: Without monthly loan payments, you'll have more disposable income for other investments or expenses.
  4. Faster property ownership: In the case of home loans, you become the sole owner of your property sooner.
  5. Tax benefits: Depending on the loan type and country, there may be tax advantages associated with loan prepayment.
  6. Financial flexibility: You can redirect funds that were going towards loan payments into savings or investments.

However, it is crucial to assess any prepayment penalties, consider your financial goals, and consult with a financial advisor before deciding to foreclose a loan.

How do you foreclose a home loan?

To foreclose a home loan, follow these general steps:

  1. Contact your lender: Reach out to your lender to inquire about the foreclosure process and request a foreclosure statement.
  2. Check prepayment penalties: Review your loan agreement to understand if there are any prepayment penalties or charges for early closure.
  3. Arrange funds: Ensure you have the necessary funds to pay off the remaining loan balance, including any outstanding interest or penalties.
  4. Obtain a foreclosure statement: Request a foreclosure statement from your lender, which will detail the exact amount required to settle the loan.
  5. Make the payment: Submit the payment as specified in the foreclosure statement, either through a lump-sum payment or by following the lender's instructions.
  6. Receive release documents: Once the payment is received, the lender should provide you with documents confirming the loan closure and the release of the property's title.
  7. Update property records: Ensure that your property records and the land registry reflect the loan closure and your ownership status.
  8. Inform credit bureaus: Confirm that the loan closure is reported to credit bureaus to positively impact your credit score.

It is essential to follow the specific procedures outlined by your lender, as they may vary depending on the institution and the terms of your loan agreement. Consulting with your lender and, if necessary, seeking legal or financial advice can be helpful during the foreclosure process.

How to avoid foreclosure charges on home loans?

To avoid foreclosure charges on home loans:

  1. Examine loan terms: Carefully review your loan agreement to understand prepayment conditions and charges.
  2. Increase EMI payments: If your financial situation improves, consider raising your Equated Monthly Instalment (EMI) payments or making extra payments whenever possible. This can expedite loan repayment without triggering foreclosure charges.
  3. Plan your finances: Develop a budget and financial plan to ensure you meet your loan obligations and avoid default.

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