Foreclosure of home loans

The closure of your home loan account is as significant a process as opening it. It can be done either at the end of the tenure or before the specified tenure, provided you have an alternate source of funds. If you’re planning to close your loan before the scheduled tenure, then it is advisable to let the bank or financial institution know in writing.

Banks and housing finance companies (HFC) usually charge a prepayment penalty if a loan is closed ahead of tenure. However, as per the new RBI mandate, banks are not allowed to charge prepayment penalty on floating rate loans. This is an enormous leap forward for consumer welfare and home loan borrowers.

In the case of prepayment of a loan, you need to start the entire foreclosure process with a request to find out the outstanding amount including interest, followed by one stating your inclination to pay the entire amount by a particular date. It is a good practice to check the due date of the next EMI payment in order to save on one month’s additional EMI expense.

Once all your payments have been made, the bank or HFC will return the original documents which you had submitted initially. Normally, you will get an acknowledgement of the submitted documents at the time of loan sanction, clearly stating whether the documents are original or fake. This will help you find out if any documents are missing. However, do not just check for documents alone. While submitting the documents before the bank officer, ensure that all the pages are intact. Furthermore, ask for a receipt for the full and final payment from the bank.

It is also very essential to take a No Dues Certificate, which is a clearance certificate from the bank or HFC. This states that the bank does not have any more interest in the property, and that all the dues are paid by the borrower, and the lender does not have any rights or claims on the property. Additionally, request the banker to provide a Foreclosure of Loan Letter.

In cases where the credibility of the borrower becomes questionable, some banks might create a lien. A lien is nothing but a transaction registered in the Registrar office which prevents you from selling the property. If no lien is created, then no issue will arise. However, if a lien is created, it has to be removed otherwise you will not be able to sell the property.

Being debt-free should be your eventual goal, but you also need to evaluate the tax benefits of a home loan. Under the current laws, you are entitled to a tax rebate for interest repayment up to Rs 2 lakh per year. Furthermore, you can get added tax benefits under Section 80 C on repayment of principal amount up to Rs 1.50 lakh per year. You should ask yourself if you would like to retain a long-term liability just to avail of the tax benefit.

If you have opted for an auto-debit/ECS of home loan EMI with the same or different lender, it is important to cancel the same. Submit copies of the No Dues Certificate and Foreclosure of Loan Letter along with the cancellation letter. In addition, if you have given post-dated cheques, you must inform the bank in advance so that they can return the cheques along with other documents.

Read the terms and conditions in the sanction letter carefully and seek clarifications to avoid unpleasant surprises. If needed, hire a financial advisor or chartered accountant before you sign it. 

It is not sufficient to just pay back your home loan. You must ensure that you complete all the necessary procedures of home loan closure to avoid any future problems.

(The author is Executive Director, Centrum Investment Banking and Head Real Estate Group)