While buying a property, applying for a home loan is a common practice in case more funds are needed to afford your dream house. The loan is repaid through Equated Monthly Instalments (EMIs) however, borrowers may settle the outstanding amount before the loan tenure concludes—a process known as home loan foreclosure. 

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Let’s understand the concept of home loan foreclosure, the procedural steps involved, and key factors to consider before opting for foreclosure while understanding regulations.

What is Home Loan Foreclosure?

Home loan foreclosure refers to the process of fully repaying the remaining loan balance in a single lump sum payment, ahead of the scheduled EMI timeline. This allows borrowers to clear their debt faster and reduce the total interest paid over the loan’s duration. Foreclosure can be initiated at any point during the loan tenure, even after several EMIs have been paid.

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To calculate the foreclosure amount, borrowers can check their online home loan account or visit the branch of your bank or financial institution. Bank will give you a repayment details and charge you the interest till date on the loan along with total amount outstanding.

How to Foreclose a Home Loan

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Before you proceed with a home loan foreclosure, it is essential to evaluate key financial factors:

 

Inform the Lender: You must inform your lender of your intention to foreclose the loan. This allows the lender to prepare the necessary documentation and calculations.

Joint home loan: For join home loans, you must come with your co-borrowers as his signature would be needed while you process your foreclosure request.

Documentation: Carry a cheque book. You need to ensure that your account has sufficient funds to clear your cheque and help bank process your closure request at the earliest. Lenders may also ask you for your three months bank statements before they issue you an NOC.

Payment Assessment: The lender will assess the total outstanding amount, including the principal balance and any applicable foreclosure charges.

Obtain a No Objection Certificate (NOC): After full repayment, request an NOC from the lender. This certificate confirms that there are no outstanding dues, releasing you from further obligations.

Take Original Property Documents: Don’t forget to collect and check all original property documents submitted to the lender at the time of loan sanction.

RBI’s Guidelines on Foreclosure Charges

The Reserve Bank of India (RBI) has implemented guidelines concerning foreclosure charges and pre-payment penalties. According to a circular issued on 5 June 2012, banks are not permitted to levy foreclosure charges or pre-payment penalties on home loans with floating interest rates sanctioned to individual borrowers. 

Also, the RBI released draft norms on 21 February 2025, proposing to eliminate foreclosure charges on floating-rate loans for retail and Micro, Small, and Medium Enterprises (MSME) borrowers. Once approved, this will apply to all floating-rate loans, including those granted for business purposes to individual borrowers.

Factors to Consider Before Foreclosure

Before proceeding with a home loan foreclosure, it is essential to evaluate the followings:

Tax Implications

Home loans offer tax benefits under Sections 24(b) and 80C of the Income Tax Act, 1961, for interest and principal repayments. If you foreclose the loan early, you may lose these deductions. Assess whether the interest savings from foreclosure outweigh the potential tax benefits.

Foreclosure Charges

If the RBI’s proposed guidelines are implemented, borrowers with floating-rate loans will no longer face foreclosure penalties. However, borrowers with fixed interest rate loans may still face charges. Confirm the applicable charges with your lender before proceeding.

Impact on Savings and Investments

It is important to assess whether continuing with EMI payments allows for better utilisation of funds through investments that could yield higher returns compared to the interest saved via foreclosure. Sometimes, investing surplus funds rather than foreclosing may generate better financial outcomes.

Home loan foreclosure is an important financial decision that can lead to significant interest savings and faster debt elimination. The RBI’s guidelines on removing foreclosure charges on floating-rate loans make early repayment more appealing and cost-effective for borrowers.