Home loan is one of the biggest financial decisions of a family as it involves a large loan amount and a commitment to pay monthly a committed amount for 20 years. Hence, this expense becomes one of the major expenses in the household budget.
It is always prudent to review the options to reduce this expense periodically taking into various factors like liquidity, tax advantages, other investment options etc.
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Why should you foreclose the home loan?
Reduction in debt servicing expenses
In absolute terms, home loan incurs the big monthly outflow as the loan amount is higher and the repayment longer. Foreclosing a home loan will reduce your outflow and allow you to save more of the income for various other requirements and investment opportunities. Also, it will secure you against interest rate fluctuations, especially in an increasing interest rate regime.
Clear title to the property
If you intend to sell the property to take advantage of any appreciation, it would help if you possess a clear title. It could improve your bargaining position.
Effective allocation of funds
In case a person has lump sum funds, it is prudent to evaluate the deployment of the funds in investments or foreclosure of loans. One needs to evaluate the post tax returns of investments vs savings on foreclosure of loan and decide. In most cases, foreclosure of a loan will be more beneficial than investing in low risk instruments like FD, Bond etc.
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When should you consider foreclosing your home loan?
The monthly repayment is draining your savings
If your home loan EMI is causing a severe dent in your savings, consider paying it off through your idle funds. That way, you can reduce your interest outflow and also have more peace of mind.
You have received lump sum funds
If you have received proceeds from an inheritance or through redemption of earlier investments, such as an insurance policy, etc., you may consider pre-closing the loan with the surplus funds.
One of the key attractions of Home loan is the tax deductions a person can claim. The principal repaid during the year can be claimed u/s 80 C of IT Act to the maximum extent of overall limit of 150000. Also the interest paid during the year can be claimed as a loss u/s 24 up to Rs. 200000.
In case the person has exhausted the above deduction by other means then it would be prudent to foreclose the loan if possible.
You intend selling the property
When you sell the property, it is advisable to close the loan if possible so that the buyer gets confidence he shall get clear title and seller need to not at last moment liaise with the financial institution to get the original documents back as it may take time to get the documents back after closure of the loan
Proactively assess the pros and cons, especially the timing of the pre-closure, and then take the following steps to action your decision to pre-close.
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How do you pre-close your home loan?
Submit a foreclosure request
Apply for the foreclosure in writing. Many financial institutions provide a customised application for the same and also allow you to apply online through their portal/app. You may be asked to provide the existing home loan account number, copy of address proof, PAN copy, etc., for the same. The FI issues a foreclosure letter stating the amount and dues outstanding on that date for making the payment
Once a person receives the foreclosure letter and amount due, she can make the payment by way of cheque or online transfer (NEFT/RTGS).
Obtain the documents
On receiving the proceeds as per the foreclosure statement, your home loan provider will complete the foreclosure formalities. Your loan will be marked and reported, wherever necessary, as successfully closed. You will then receive the documents, including property title deeds, sale agreements, etc., along with a no-dues certificate that would mention that since the loan has been repaid in full, the bank has no enforceable interest in the property.
Abey Abraham, General Manager & Business Head – Housing Loan, South Indian Bank.