Important Pointers To Remember When Prepaying and Closing A Home Loan
22 Jun 2016
Buying a home is one of the best moves an individual can make, especially when it comes to adding to the assets column of your balance sheet. To eliminate the risk of losing your home, when you’ve purchased it with a Home Loan, ensure you pay off the outstanding amount as soon as possible.
What is a Home Loan?
A Home Loan is used to finance your dream home. As most Home Loan borrowers know, this loan calls for you to mortgage the property with the lender. Along with entrusting your home with the bank or NBFC, you have to hand over all the property papers, which they will keep until you close your loan account.
Prepayment of Home Loan
Usually, when it comes to EMIs, the Housing Loan rates are factored into calculations along with the principal amount, arriving at a number that is easy to pay each month. With this EMI in tow, you can repay your Home Loan over a span of a couple of decades, if not years.
But, if you stumble upon a windfall, there is no reason not to use it to pay off your loan. In fact, by opting to prepay your loan, you can save on interest charges.
If you want to initiate the closing process of the loan, with a prepayment, you will need to submit a request for the outstanding loan amount. In the request, you will also have to mention your intent to foreclose the loan account.
Once this is done, you will need to look at the interest amount your loan has racked up. With this information in hand, you will have to decide when you want to close your account—in the middle of your repayment cycle or when the interest charges are calculated by the bank or NBFC.
Many financial institutions, banks and NBFCs alike, waive off these charges if the lump sum you use to pay off the loan comes from your own reserves. If you sell real estate or other assets to close you Home Loan, you will need to provide documents to serve as proof of that.
Otherwise, Home Loan borrowers are sometimes called to pay prepayment charges to the bank they’ve borrowed from. Fortunately for borrowers with floating rate loans, a mandate passed by the Reserve Bank of India states that prepayment penalties are not to be collected on such loans.
Tips to keep in mind during Loan Account Closures
Nevertheless, if you are on the verge of closing your loan account—either with a prepayment or your last EMI—there are certain things to keep in mind during the process.
- Collect all the originals
When you are done with the loan, you will need to get your original documents back from your lender. For properties, this is the title deed or mother deed.
Make sure all the pages are in the order, and don’t just skim the first pages of the contract. By doing so, before you sign the bank or NBFCs acknowledgement, you are saving yourself from the risk of being unable to change things later. If there is a page missing, or even a section for that matter, getting that part included in the document later can prove to be a tedious task.
- Make sure no one objects
To ensure this point, obtain a no-objection certificate from the bank or NBFC. This piece of paper serves as a clearance certificate from the financier, stating it has no further ties to the property. This NOC will declare the owners to be in full ownership of the property without any hypothecation to the bank.
The NOC should have all relevant details like name, complete address, loan details, the day the loan account was opened, and the date the loan account closed. The most important part of this letter would be the section where the bank or NBFC states there are no other dues pending from the borrower—you.
- Get your credit score updated
At the beginning of your loan tenure, your credit score would have been updated to reflect the same. If you were to apply for another loan, your score would tell potential lenders of the debts you still have open. Since your loan account has reached its end now, you need to get the credit score updated because lenders sometimes overlook the fact that they need to update your CIBIL score.
Ensure they do update it, as failure to do so could lead to potential future financiers thinking you are liable to default or pay EMIs late.
- Remove lien on the property
In layman terms, a lien is seen when a lender registers the property in the registrar office, preventing Home Loan borrowers from selling it. This usually happens in cases where there is a risk of the borrower defaulting on the loan. If your property has a lien tied to it, a representative of the bank or NBFC will need to accompany you to the registrar office to have it removed. If the lien is not removed, selling the property in the future won’t be possible.
- Get a legal clearance certificate
While this is not a mandatory step, it is an advisable one. This certificate from a lawyer would help in the selling the property and it would help bring about a sense of closure that you are completely debt-free now. Also, a consultation with a lawyer would tell you if your Home Loan closure procedure was fair, thorough, and well-executed.
With ample research, you can know what each step of a Home Loan entails, right from choosing the right Housing Loan rates to drawing the curtains down on your last EMI payment. Keep these pointers in mind and you’ll be able to close your loan account without any hiccups.