In case your financial institution charges a foreclosure penalty on home loans, raise a complaint with the branch.
Last Friday (August 2), the RBI barred non-banking finance companies (NBFCs) from charging pre-payment penalties or foreclosure charges from individual borrowers.
According to a notification from the RBI, NBFCs shall not charge foreclosure charges or pre-payment penalties on any floating rate loan products other than business loans to individual borrowers, with or without co-borrowers. But, the effective date is not specified in this notification, so there could be a follow-up statement from the central bank.
However, it’s interesting to know some of the housing finance companies (HFCs)/NBFCs such as HDFC, LIC Housing Finance, Indiabulls Housing Finance and PNB Housing Finance do not charge foreclosure penalties from borrowers.
Sukanya Kumar, Founder & Director of home loan advisory firm, RetailLending.com says, “These HFCs / NBFCs had stopped charging foreclosure penalties within two to three months after banks stopped in May 2014 as per regulation. They might have decided internally not to have foreclosure charges/penalties from borrowers to be on a competitive edge with the banks.”
However, there were some smaller NBFCs charging foreclosure penalties from borrowers during these years.
Relief to home loan borrowers
There are some NBFCs charging foreclosure penalties in the range of one to four percent on the outstanding principle. For example, if you have a home loan of Rs 50 lakh from an NBFC, with a tenor of 20 years and 9.5 per cent floating interest rate, your EMI would be Rs 46,607. You continued to pay EMIs (equated monthly instalments) for ten years, i.e., 120 months. After ten years of paying your EMIs, you decide to foreclose this outstanding loan. So, in 121st month, you will pay a foreclosure amount of around Rs 36.01 lakh, which includes outstanding principal and foreclosure penalty charges. The penalty charges would range from Rs 1,699 to Rs 6,797.
Now, NBFCs won’t charge this pre-payment penalties or foreclosure charges from individual borrowers after this RBI notification. So, in this case foreclosure penalty will be savings of Rs 1,699 to Rs 6,797 for home loan borrowers.
How to foreclose an existing home loan?
Write an application to your financial institution for foreclosure of home loan. You may need to provide your account number and submit a copy of your permanent account number (PAN) and copy of address proof.
Verify foreclosure amount
The bank will calculate the foreclosure amount taking into consideration the total outstanding dues, interest paid and the remaining loan tenure. Says Sukanya, “Verify whether your financial institution has levied any foreclosure penalty on the outstanding amount with your financial advisor. In case your financial institution is charging a foreclosure penalty on the home loan, then raise a complaint with the branch. If it’s not resolved, then raise a complaint with the banking ombudsman.”
Assess tax benefits you may have to let go
While taking a home loan you can save taxes on the interest as well as the principal outgo. You can claim an interest deduction up to Rs 2 lakh per annum under section 24 and Rs 1.5 lakh deduction on principal under section 80C. Sapna Tiwari, Co-Founder and COO, Rupeewiz Investment Advisors says, “You will have to let go this tax benefits while foreclosing home loan. So, analyse this scenario and calculate tax outgo while deciding to foreclose existing home loan.”
Collect original documents
After completing the foreclosure formalities, you should collect original property title deeds, no dues certificate and related documents from the financial institution within 10-15 days. Also, inform credit rating bureaus about the foreclosure of home loan so your credit record is updated.
