How to Avoid Prepayment Penalties on a Home Loan (India)

Paying back a loan in advance to reduce the burden of interest can be a great idea. But one needs to be aware of all the clauses of prepayment penalty before making any advance/early repayments. Common terms for early repayment charges include early repayment penalty, prepayment penalty, or early redemption fee. Therefore, if you wish to opt out of your loan within the specified period by paying off the balance in advance, your lender may charge you a prepayment penalty.

The Reserve Bank of India has issued a directive with regard to the policy of prepayment penalties on home loans and has barred banking institutions from charging the fee. However, currently, this restriction on prepayment penalty is applicable only for home loans at floating interest rates. The restriction has not yet been applicable on fixed rate home loans opted by majority of home loan borrowers in India. Here’s how you can try to avoid prepayment penalties on a home loan.


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    Check With The Bank. If you want to pay off the balance loan amount before the specified term, then you need to check before hand if the bank applies a charge for it or not. Even if you wish to move an existing loan into a debt consolidation loan, you still have to pay a prepayment penalty.
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    Talk To Your Lender. Ask your loan agent if your loan carries a prepayment penalty. Also inquire whether you can buy out the penalty. Ask the loan lender if you qualify for any other program which can exempt you from a prepayment penalty.
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    Find out if there is a Prepayment Penalty Term. Before choosing the loan, always go for the one with a shorter prepayment penalty term. Make sure you consider the duration you’re planning to stay in your new home.
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    Contact your current lender and use your negotiation skills. They needn’t necessarily work, but you can definitely give it a try. Tell them that you would like to refinance, but wish to avoid paying the penalty.
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    Switch to a Floating Rate. Ask your bank if they permit switching your home loan from fixed to floating rates within the specified term. Some banks permit this, as floating rates are comparatively lesser than the fixed interest rates. Therefore, before paying off the balance in advance, see if you can switch over first.
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    Make Partial Prepayments. In some cases, banks allow home loan borrowers to make a partial prepayment of the balance amount so as to reduce the total loan amount and the interest charged on it. Banks may permit up to 25% prepayment of the outstanding amount at once without charging any penalty on it. You can again make a prepayment of up to 25% of the remaining amount after certain duration to avoid prepayment penalty charges.


  • Prepayment penalty is not a concern - after the new regulation - as these charges are now a restrictive practice.
  • Consider your immediate financial needs before paying off the balance amount at once. For instance, your quick payment can wait, for you might need that money in future for a wedding in the family or your child’s education.

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Categories: Mortgages and Loans