November 27, 2022

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How Does Home Loan Foreclosure Work?

A home loan can be a boon for people looking to buy homes. But, it can also be a long-term financial burden, which may extend for 20-30 years. Can I foreclose my home loan or when can I foreclose my home loan are questions that often pop up in the minds of borrowers. Borrowers often look to foreclose their loans, to get rid of the tension of paying the monthly EMI. In this article, we share with you all the information you need about home loan foreclosures. 

What is Foreclosure of Home Loans?

Home loan foreclosure refers to full payment of the remaining loan amount in one single payment instead of in the form of several EMIs. If you opt for foreclosure, you can repay the home loan amount before your scheduled EMI period. Usually, no pre-payment penalty can be levied on foreclosure of floating rate loans but some charges on fixed-rate loans may be levied. 

How Does Home Loan Foreclosure Work?

Home Loan Foreclosure Charges

Can I foreclose my home loan is a question that comes to every borrower’s mind. Did you know that some lenders charge you for foreclosing it? Before April 2012, lenders used to charge 5% as home loan foreclosure charges. Recent RBI guidelines, however, mandate that borrowers should not be made to pay any home loan foreclosure charges if they have availed of the loan on floating interest rates. Thus, no foreclosure charges are levied on floating interest rate home loans but fixed interest home loans attract foreclosure charges (usually 1% to 5%).

Home Loan Foreclosure Calculator

Before approaching the bank to discuss home loan foreclosure, you can check the website of your bank or lender from whom you took the home loan. You can use the home loan foreclosure calculator on their website to what kind of foreclosure charges will you have to pay in case you opt for the facility.

Foreclose Application & Bank Acceptance

In case you want to foreclose your home loan, give an application to the bank stating your request to do so. Mention your home loan account number in the application and add a copy of your PAN and address proof.  The bank will then approve your request, and calculate how much outstanding loan amount you need to pay, by taking into consideration the EMIs and the interest paid till that point. If it is a fixed-rate home loan, the home loan foreclosure charges as applicable will be added to the outstanding amount. If you took the loan on floating interest rates, you will be required to pay no additional charges. 

Returning Your Documents

Once the borrower clears the outstanding amount, the bank will close the home loan account, stop the EMI payment instructions and return the property deed and related documents to the borrower. Also, the borrower must remember to take the “No Dues Certificate” from the bank stating that no outstanding amount is pending. The document should contain the property holder’s name and property address.

Advantages of Foreclosing a Home Loan

Here are the advantages associated with foreclosing a home loan:

  • Home loan foreclosure can help you save a substantial amount on the interest component
  • You don’t have to keep track of monthly EMI payments and all the headaches associated with it
  • You can take advantage of bank offers and transfer your home loan to another lender for better interest rates — this is called a home loan balance transfer. As such, you can foreclose the home loan and transfer it to another lender. This can help you reduce the loan’s overall tenor, besides helping you avail of lower interest rates

Disadvantages of Foreclosing a Home Loan

  • Benefit of tax deductions under various sections will be unavailable to you after loan foreclosure
  • Foreclosing the home loan by using your savings can drain your bank balance and leave you short of funds for emergencies or other expenditures
  • Foreclosure charges may be added

Final WordsCan I foreclose my home loan is a common question asked by most borrowers? Well, you can, but it is a tricky question and the answer to whether or not you should foreclose your loan would depend on your financial situation and priorities. If you prefer peace of mind, then maybe, foreclosure of a home loan is a good decision if you can afford it. But if your main objective behind taking a home loan was to save on income tax, then probably you should continue paying EMI to the full term rather than thinking of foreclosing the home loan. You can foreclose the loan if you wish to buy a second home with another loan or if you have a balance transfer offer from another bank for a lower interest rate. It is best to avoid paying from your savings to foreclose the loan as you may need money for other purposes. So, go for a foreclosure only if it is overall beneficial for you.