Prepayment Penalty on Home Loan

How to Avoid Prepayment Penalty on Home Loan

Prepayment Penalty on Home Loan

The prepayment penalty is the charges that are applicable to the borrower when they decide to pay the loan amount in advance. The borrower takes this decision to reduce the interest burden and save money.

If a person prepays the loan amount, then the bank loses it’s earning in terms of interest rates on the loan amount. Due to this reason, they try to discourage prepayment on any kind of loan by charging a prepayment penalty.

Tips to Avoid Prepayment Penalty on Home Loan

Below are few tips, which can help you avoid and reduce the prepayment penalties that banks charge on the customers.

Negotiate: The applicant should discuss and try to negotiate on the prepayment penalties with the lending institutions. The bank may not help the customer by reducing the Interest Rates, but it can help the borrower by allowing prepayment of the loan, an extension of tenure or lowering of monthly installments, etc.

Switch to Floating Rate: There are few banks that may allow you to Switch Your Loan from fixed to floating between the tenure of the loan. It is allowed as the floating interest rates are lower than that of fixed interest rates.

Therefore, prior to prepayment your loan, one can try to switch the loan from fixed to floating. In the case of a floating rate type of loan, the bank cannot take any prepayment penalty.

Make partial Prepayments: There are few cases where the customer can approach the bank to allow him to make a partial prepayment of the loan amount. The bank may allow you to prepay 25 percent of the loan amount without charging any penalty.

Prepayment from Own Source: Prepaying your Loan from ones’ own resources does not invite any prepayment penalty from the bank. One can use the various sources such as maturity of policies, sale of other properties or assets are acceptable means to repay a loan without penalty.

The housing loan requires a prepayment period over a period which can be as long as two decades. Thus, the borrower should calculate the amount and tenure of the loan, so that there is no unnecessary EMI burden in between.

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