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The process of foreclosure occurs when the borrower pays off his debt in full before the loan's term expires. This way, they can drastically lower their interest burden, and the loan account is also closed out much earlier than expected.
Reduce the overall interest liability on the loan.
Early repayment increases one’s credit score.
Higher tax rebate for borrower in the year as Prepayments towards home loans are considered for tax deduction(s).
Negotiate repayment tenure as per one’s need.
It is the month in which the borrower pays off the entire sum of the loan all at once and ahead of schedule.
Prepayment of a loan allows the borrower to make partial payments or complete loan repayments of the outstanding balance before the loan's term expires. Thus, it shortens the loan period and monthly EMI.
However, a foreclosure allows the borrower to pay off his entire loan obligation at once before the loan's term is over and the borrower is left with no further liability to the bank.
The extra charges that lenders charge borrower(s) for paying off the loan before the term is up are known as a foreclosure charge, sometimes known as a prepayment penalty. Most lenders typically impose a one- to two-year lock-in term during which borrower(s) cannot foreclose on the loan.
Banks and NBFCs are not allowed charge any Foreclosure/Prepayment penalty charges for floating interest rate term loans given to individual borrowers (with or without co-applicants) for purposes other than business.
Therefore, the borrower must confirm that no prepayment penalties have been included by the lender to the computation of the foreclosure amount.
As per RBI circulars DBOD.No.Dir.BC.107/13.03.00/2011-12 dated June 5, 2012, and DBOD.Dir.BC.No.110/13.03.00/2013-14 dated May 7, 2014, banks are not permitted to charge foreclosure charges / pre-payment penalties on home loans / all floating rate term loans sanctioned to individual borrowers. Floating loan products include housing, corporate, vehicle, and personal loans.
Despite the RBI mandate, some banks charge foreclosure charges on personal loans ranging anywhere between 4-5% of the outstanding loan amount. Check if your bank also charges similar fees on foreclosure of loan.
1. If so, then calculate the prepayment charges as against the interest to be paid in the future if the loan continues.
2. If one chooses Foreclosure on a home loan, then one has to give up on the tax benefits under sections 80C and 24b of the Income Tax Act.
3. If possible, foreclose loans at the beginning of the loan tenure as interest liability is highest at the beginning of the loan tenure than prepaying at a later date.
4. Do not opt for a higher EMI as it affects debt to income ratio and in-turn credit score.
Indian law regulates the waiver of foreclosure charges through the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 which allows the lender to take possession of the security and sell it without the intervention of the court. However, the lender has to comply with the due process of law and serve notice to the borrower before taking possession of the security.
Under Indian law, there are certain restrictions on the waiver of foreclosure charges. For example, the lender must follow the due process of law and serve notice to the borrower before taking possession of the security. Additionally, the lender must comply with all other legal requirements, such as obtaining court orders as per the SARFAESI Act, 2002.
If your request for a waiver of foreclosure charges is denied under law, you may still have other options available to you. For example, you may be able to negotiate a loan modification or a one-time settlement with the lender, or you may be able to seek assistance from a legal advisor. It's important to consult with a legal advisor to explore all of your options.