Most banks like the SBI, ICICI etc, with the main purpose of attracting prospective home loan borrowers are enticing them with 0 prepayment charges.
State Bank of India quite recently, have taken a giant step by abolishing the prepayment charges on home loan borrowers, irrespective of the fact whether the borrowers are new or old, or if the borrowers have adopted a fixed rate or floating policies and even if they were prepaying from their own personal sources or are switching their lenders. ICICI bank have also followed the same route and have waived off all prepayment charges on home loan borrowers.
The entire logic behind this decision is quite simple to understand. When there is a hike in the interest rates, borrowers who are utilizing the floating interest rates on their loans will have to face the brunt. After receiving a lot of complaints from customers on the fact that banks are quite slow when it comes to passing on reduced interest rates to the customers and prefer to opt that strategy for new customers, having prepayment charges just increase one’s financial burden.
Earlier, due to the above mentioned problem of cheaper interest rates being offered to new borrowers, existing borrowers were fearful of transferring their home loans to new lenders since the prepayment charges used to be quite high in such cases. Therefore, existing borrowers were forced to stick to their respective Banks or Housing Finance Companies (HFCs) and were not in a position to change to those lenders who provide loans at comparatively lower rates of interest.
Before you tempt yourself by this waiver, it is important that you understand as to how this change can work in your favor.
The right time:
With the possibility of switching to a new lender, many borrowers may find the question- what is the right time to start prepaying your loan, quite trivial. The answer is simple. It is always best to prepay your home loan during the first five years when the loan was disbursed to you. The main reason being, the interest component in your loan is much higher in your EMIs and the principle amount is quite less.
Doing so, you can save a good amount by paying your interest outgoing. Setting aside funds for prepaying the principle will not only help you to make your dream home “yours” as soon as possible but also help you get rid of the financial burden and enable to channelize your finances for other important purposes. That is the main reason as to why most home loan borrowers strive hard to repay their loan within a maximum time period of 10 years even though the loan tenor may vary from 15-25 years.
Also, it is important for you to consider the tax benefit aspect that you as a borrower can accrue if you plan to prepay your home loan. Under section 80C, to the extent of Rs 1 lakh, you can claim deduction on the principal amount repaid, which is the overall cap. The interest amount paid also entitles you as a borrower to a deduction up to Rs 1.5 lakh, under section 24.
Therefore before you jump to any conclusion make sure that you do a cost benefit analysis on the same. The prepayment decision can best benefit those individuals who are in their 40s and are looking to wind up all their debt before they retire or plan to have a debt free future. Else for those in their 30s, prepaying their loan should not be the first option.
Do not extend the tenor!
If you are a borrower who is not able to prepay your home loan in large sums in the said initial 5 years, you can consider inflating your EMI payments up to a limit you are comfortable paying. In the eventuality of a hike in the interest rates it is the tenor of the loan and not the EMI aspect that banks ask you to look into. This can increase the burden on your finances since the total outgo of your cash if the loan tenor is stretched is comparatively higher than the decision of increasing your EMIs.
Bank’s Policy:
Although RBI has issued notices to all banks to follow pursuit, the National Housing Bank has advised the Housing Finance Corporations (HFCs) to waive off the prepayment charges on those borrowers who are prepaying their home loan. However, most HFCs are yet to receive confirmation about this waiver, which is causing a bit of an inconvenience to their customers. Therefore as a prudent borrower it is important for you to understand the banks’ policy before you decide to prepay and avail a written confirmation on the same to avoid any hassles in future.
Other Charges:
When one charge is dropped, banks generally try to cover up that income by increasing the rates of other charges. Therefore it is important for you to keep an eye on such changes so as to keep yourself in light about any such changes.