Understanding Home Loan Prepayment - Rules, Benefits, and Charges
15 May 2019
If you are looking to reduce your debt burden, you should consider prepayment of home loan. As soon as your finances improve, you can choose to finish your home loan, either in part or in full. If you repay your home loan completely or in part before the scheduled tenure, it is called prepayment of home loan.
While most banks allow for a prepayment of home loan, some banks may charge a small fee for pre closure. It is, therefore, advisable to consider all the pros and cons of foreclosure before taking the plunge.
Who is eligible for a prepayment of home loan?
All home loan borrowers are eligible for pre closure, as long as their bank offers this facility. You can ensure that you have the option of prepayment of home loan at the time of taking the loan.
Most banks do not encourage prepayment as it causes a loss to them. When you decide to pay off a loan ahead of schedule, banks incur additional costs for rerouting the funds through credit channel. Therefore, banks may impose a fine for preclosing your loan.
That said, you are well within your rights to foreclose your loan—in part or full—if it gives you long-term benefit. If, even after paying the fine, you are saving on the interest you pay every month, it is worth foreclosing the loan.
How to do prepayment of home loan?
There are many ways in which you can prepay your home loan. You can either go all out and completely repay the loan ahead of schedule or you can pay off a part of your debt. You can also work on a combination of the two.
- Start small, go up gradually: One way of prepaying your home loan is starting with a small prepayment in the beginning of the loan and to increase this amount every year at a constant rate. You can do so by saving through the year and spending your savings on prepayment.
- Fixed prepayment: You can do this by prepaying a fixed amount towards your principal every year. This you have to do over and above your EMI payments. Plan your expenses through the year and make a fixed saving every year. Spend this saving on prepayment to reduce principal.
- Higher EMI: Another way of reducing your principal is by paying more than your calculated EMI. Every month make a payment that is slightly higher than your EMI. This goes a long way in reducing your debt burden.
- Full repayment: If your finances have improved tremendously or if you have been able to mobilise a large sum of money, you can completely pay off your loan ahead of your tenure. You may, however, have to pay a fine for full prepayment of home loan.
Home loan prepayment rules
The Reserve Bank of India (RBI), from time to time, revises the rules it has set for “Levy of foreclosure charges/ pre-payment penalty on Floating Rate Loans”. It specifies the conditions in which banks and housing finance corporations (HFCs) can charge prepayment charges.
- When are banks and HFCs allowed to charge prepayment fees:
- Home Loan is taken by non-individuals: When a company or firm borrows funds in the form of housing loan, it is not exempt from foreclosure charges.
- Fixed-Rate Home Loan: If you have taken a fixed rate home loan, you will be levied a foreclosure charge for prepayment of home loan. A fixed-rate loan is when the rate of interest is the same throughout the loan tenure. Both banks and HFCs are allowed to levy a penalty on foreclosure of home loan. HFCs, however, can charge a penalty only if you are repaying the loan by borrowing from another bank or HFC. HFCs cannot charge any prepayment penalty if you prepay the loan with your own funds.
- Dual rate home loans: Banks are allowed to charge a penalty for foreclosing a dual rate home loan, which is a combination of fixed rate and floating rate of interest. In such cases, the interest rate is fixed for the first few years and then becomes variable.
- When are banks and HFCs not allowed to charge prepayment fees:
- Floating rate home loan for individuals: Home loan prepayment rules state that prepayment charges or penalties are not levied on borrowers for taking a floating rate home loan. No extra charge is levied on either part or full payment of the loan.
- Paying fixed rate home loan from HFCs with own funds: HFCs can not charge prepayment penalty on fixed rate home loan if the individual is repaying with his/ her own funds.
- Dual rate home loan: Both banks and HFCs cannot charge a penalty if the borrower prepays the loan after it has shifted to variable rate scheme and has become a floating rate loan.
Prepayment of home loan may not always be the right decision. Only if the long-term benefits surpass the penalty to be paid, should you consider prepaying your loan. If you plan your prepayment well, you may be able to save a lot on interests.
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Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes and do not necessarily reflect the views of Bank of Baroda. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Bank of Baroda and/ or its Affiliates and its subsidiaries make no representation as to the accuracy; completeness or reliability of any information contained herein or otherwise provided and hereby disclaim any liability with regard to the same. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Bank of Baroda or its affiliates to any licensing or registration requirements. Bank of Baroda shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
How to Remove Car Loan Hypothecation After Car Loan Repayment
A secured loan is a loan in which an asset is hypothecated to the lender. Since the lender finances the purchase of the asset, the original purchase papers of the asset are with the lender. When it comes to purchase of a home, the asset’s ownership shifts to the borrower once he has completely repaid the loan. In gold loans, the gold is left under lock and key with the lender. Once the loan is repaid, this gold is given back to the borrower. However, it is not the same when it comes to a car loan.
In a car loan, the car purchased is hypothecated to the lender. The lender pays the funds to purchase the car. However, a car also has to be registered with the Regional Transport Office (RTO) before it can be driven on the road. In such a case, the name of the lender appears on the registration certificate (RC) of the vehicle/ in the records of Regional Transport Office. This means you need to take a few additional steps once the car loan is repaid for car loan hypothecation removal. Once the car loan hypothecation is removed and the car’s ownership is completely in your name, then you will have a clear title and ownership to your car. This is especially important while getting insurance. In case anything happens to the car, the Insurance claim will go to the owner of the car, which in case of hypothecation, will be in favor of the lender.
This is why car loan hypothecation removal is important.
How to remove hypothecation from RC after car loan repayment/termination:
Step 1: Repayment of car loan
In the hypothecation agreement of car loan, the name of the lender appears as the owner for the car. To start the procedure for removal of the lender’s name, you need to repay the car loan completely. The loan must be paid off and a nil balance must appear in the lender’s books.
If you are planning to prepay your car loan, it is better to inquire with the lender about their prepayment charges and conditions. Sometimes lenders have prepayment charges on these loans and this can go up to 2%.
Once you’ve completely paid off the loan, you need a no dues certificate from the lender. This certificate will state that you have completely discharged the dues to the lender.
Step 2: Collection of documents from the lender
Once the loan is repaid, the lender will give you the no dues certificate. Along with this, you need to collect:
No objection certificate:
This certificate states that the lender does not have any objection with car loan hypothecation removal. One important point to remember is that you must take multiple copies of the No Objection certificate. This No Objection certificate will need to be submitted to the RTO and to the Insurance company. You will also need one copy for your own records. Usually, the no objection certificate is valid for 3 months. So, you must approach the RTO immediately after you get the no objection certificate.
Form 35
This form is a notice of termination of hypothecation. This form also has to be made in triplicate or in 3 copies. Each state usually has its own format for this form which can easily be found online or at the RTO.
Step 2: Submission of documents to the RTO
Once you have the documents from the lender, you need to visit the Regional Transport Office or the RTO with a set of documents that includes:
Original form 35 signed and stamped by the borrower and bank
Original Bank No Objection Certificate
Attested copy of PAN
Attested copy of insurance policy of car
Original Registration Certificate
Address proof
Copy of Pollution Under Control (PUC) certificate
These documents will have to be submitted to the RTO. If your address does not match the address in the registration certificate, you will need to submit Form 33 which is for change of address.
Once you submit these documents to the concerned officer at the RTO, they will get them verified. You need to pay the respective fees to get the process completed. The officer will give you a time and date on which you can collect your updated Registration Certificate (RC)
Step 3: Collect your updated Registration Certificate
The date and time for the visit will be specified when the documents are submitted. When you visit the RTO on the specified date, you will get the updated RC. If there are any mistakes in the details, you can get them corrected and collect the RC on a future date. Once you collect your updated RC, you will have completed all car loan hypothecation removal formalities.
What is a Home Loan Processing Fee?
What is a Home Loan Processing Fee?
Banks and lending institutions levy a onetime charge on the different types of Home Loan products. This charge, known as the Home Loan processing fee. It is generally not deductible from the loan amount, and the borrower pays it separately. This is a fee to cover the loan processing cost incurred by the lender or the bank. Some banks may waive such processing charges for a Home Loan as part of special offers.
In the case of Bank of Baroda Home Loans, we charge a unified upfront fee which consist of:
Document Verification/ vetting charges
Pre sanction Inspection (Contact Point VerificationCPV) charges
Onetime postinspection charges
Advocate charges for a legal opinion
Valuer charges for valuation
Bureau report charges
CERSAI charges
ITR Verification charges
Post sanction proceesing fee table of Processing Fees for Home Loan
S. No.
Area of Banking Service
Service Charges (excluding GST) w.e.f. 20.06.2019
1
Baroda Home Loan & Baroda Home Improvement Loan
Slab-wise
Up to Rs 50 lakh 0.50% of the loan amount: Minimum: Rs 8,500 (Upfront) Maximum: Rs 15,000
Above Rs 50 lakh 0.25% of the loan amount: Minimum : Rs 8,500 (upfront) Maximum: Rs 25,000
The above charges are unified processing charges which include inspection, valuation and legal fees.
The above charges are for all categories of borrowers under Home Loans.
2
Baroda Home Loan Top Up
0.35% Minimum: Rs 5,000 (upfront) Maximum: Rs 12,500
3
Takeover of Home Loan (Resident /NRI/PIOs)
Flat: Rs 8,500 (upfront)
4
Pre-Approved Home Loan (In- Principle Sanction)
0.25% - 0.50%Rs 8,500 (upfront). Suppose the borrower submits the property documents within the validity period of a pre-approval letter. In that case, the balance amount of unified processing charges applicable to Home Loan will be recovered from the borrower.
Charges other than Home Loan Processing Fees
Banks also levy other charges like Home Loan prepayment fees or loan conversion charges. However, in case of a Bank of Baroda Home Loan, there are no charges applicable if the borrower chooses to prepay the loan amount before the tenure is over.
Impact of Home Loan Interest Rates
There is no correlation between the processing fee and the interest rate. However, your loan amount does factor in calculating the processing fee. A Baroda Home Loan is charged at the prevailing floating rate which is linked to external benchmark of REPO( RBI) or MCLR . The interest rate is linked to the Baroda Repo Linked Lending Rate (BRLLR) and is reset annually based on your bureau score(cibil).
Why Bank of Baroda for Home Loans
With a Bank of Baroda Home Loan, you can enjoy a free credit card and concession of 0.25% for car loans. Additionally, the bank offers free personal accident and property insurance with a Home Loan. You can also opt for a group credit life insurance cover when you apply. This cover protects the family against the borrower's death, and the family is not required to repay the Home Loan to the extent of the claim amount. You can pay the premium for the cover along with the EMIs.
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