Home Loan pre-closure
Home loan pre-closure is a facility provided by the banks or other financial institutions, wherein the borrowers can repay their housing either in part or full if you have surplus funds before the end of the loan tenure. This reduces the outstanding principal owed, which in turn reduces your EMIs or the remaining loan tenure. However, before choosing such an option, you must be aware that such a facility comes with penalty charges. But as per the guidelines by the Reserve Bank of India, banks are forbidden from collecting prepayment penalty on floating rates home loan.
Types of home loan closures
The various types of home loan closures are given below:
Regular closure - In regular closure of the loan, you need to pay a stipulated amount and number of EMIs to pay off your loan. For this, you need to carry your identity proof, loan account number, and a cheque. These documents will be verified by the officials before closing your loan account.
Bad loan closure - This happens when the borrower is unable to repay the loan amount continuously for a certain period due to bankruptcy or other financial losses. However, the financial institution may also waive off your fee after evaluating your present financial condition, or in another case, the bank may also confiscate your collateral and realize the outstanding payment.
Settled loan closure - It is a situation where a borrower is unable to pay off the entire loan amount, and therefore, the financial institution offers the borrower a discount to pay towards the overdue amount of the loan. The remaining amount is then waived off.
When pre-closing your home loan makes sense?
As we have already mentioned, pre-closing comes with a penalty charge (in case of fixed interest rate home loans). So, before pre-closing your home loan, you must consider the approximate penalty charges involved in doing so.
You should pre-close your loan only when you have paid a few installments, not when you are at the end of the payment term. Doing so will not be a good idea as you will be charged additional penalty charges.
Step by step guideline for pre-closure of home loan
Step 1: Firstly, you need to inform your bank about your willingness to pre-close your existing home loan. For this, you need to write a letter where you need to mention the present status of your existing housing loan.
Step 2: After submitting the letter, the financial institution will verify all the official property documents. If everything is in order, they will issue you a No Objection Certificate (NOC) stating that there are no outstanding dues.
Step 3: Post that, you need to collect back all the documents you submitted to your bank.
Step 4: After that, you should apply for a new Encumbrance Certificate in the registrar office after the bank has provided you a NOC and the entire existing lien on the property has been removed.
Step 5: After clearing the entire loan and receiving the acknowledgment of the same from the bank. You need to update it in your CIBIL Records.
Documents required after closing your home loan
- After closing your home loan, the bank must hand you over all the required documents. After all the dues have been paid to the bank, the documents mentioned below must be collected from the lending institution.
- If the loan account holder has expired during the loan, the property documents in the POA (Power of Attorney) format must be collected from the lender.
- To attain the property documents, the legal heir or nominee must write a letter to the bank or financial institution requesting for the same.
- A letter of abdication relinquishment must be written to surrender the property to the legal heir or nominee.
