What is a prepayment penalty on home loan?
A prepayment penalty is a fee that lenders charge when you pay off part (part-prepayment) or all (foreclosure) of your debt before the due date or the end of the loan tenor. It is normally a few basis points.
- Where the housing loan is on floating interest rate basis – pre-closed through "any source"
- Where the housing loan is on fixed interest rate basis – pre-closed through “own source”
The expression “Own Sources” for this purpose means any source other than by borrowing from a Bank/ HFC/ NBFC and/ or a financial institution.
With the above directive, the primary aim of the NHB is to safeguard the public and not advance the interests of lenders. The practice of charging a prepayment penalty hindered borrowers from closing their loans before the tenor fixed by the lender was over. This in turn prevented borrowers from taking advantage of better rates being offered by other lenders, as the amount incurred for prepayment negated the benefits that you would get from the difference in interest rates.
With the abolishment of a prepayment penalty on home loans*, home loan borrowers can now switch their loans from one lender to another that is offering better interest rates.
Prepayment vs. foreclosure
Many borrowers often mix up prepayment and foreclosure, but the difference is important when managing your home loan effectively.
Part-prepayment refers to paying an extra lump sum amount, such as Rs. 2 lakh, towards your outstanding principal during the loan tenure. This reduces the total principal, which in turn lowers the interest burden. You can then choose to either reduce your monthly instalment or shorten the repayment period, depending on your financial goals.
Foreclosure, also known as full prepayment, means repaying the entire outstanding loan amount in one go before the tenure ends. Once this is done, the loan account is closed permanently, and you become debt-free.
While part-prepayment helps ease your ongoing repayment burden, foreclosure completely ends your loan obligation.
The Bajaj advantage
Both part-prepayment and foreclosure come with zero hidden charges on floating-rate home loans for individual borrowers, helping you repay faster without additional financial stress.
Also know: What is prepayment of home loan?
*Conditions apply
Frequently asked questions
In most cases, lenders do not restrict the number of times you can make part-prepayments on floating-rate home loans. You can prepay whenever you have surplus funds, such as bonuses or savings. However, some lenders may set minimum amounts for each prepayment. It is advisable to check your loan agreement for specific terms and conditions to ensure there are no restrictions or procedural requirements.
After making a part-prepayment, you can choose between reducing your EMI or shortening your loan tenure. Reducing EMI improves monthly cash flow, making your finances more manageable. On the other hand, reducing tenure helps you save more on total interest paid over time. If your income is stable, opting for a shorter tenure is usually more beneficial in the long run.
If you use a bonus to fully repay your home loan, it is considered foreclosure. For floating-rate home loans taken by individual borrowers, lenders typically do not charge any prepayment or foreclosure penalty. This makes it easier to close your loan early without additional costs. However, fixed-rate loans may still attract charges, so reviewing your loan terms is important.
Once you fully repay your home loan, the lender provides several important documents. These include the original property papers submitted during loan processing, a No Objection Certificate (NOC), and a loan closure or settlement letter. You may also receive a statement confirming that all dues are cleared. It is essential to collect and safely store these documents, as they serve as proof of ownership and loan closure.
