How RBI's proposed norms ease home loan foreclosure for you
What's the story
The Reserve Bank of India (RBI) has made it more financially appealing for borrowers to foreclose home loans.
The move, which will ease the burden on those looking to repay their loans before the end of their tenure, comes in line with RBI's guidelines on foreclosure charges and pre-payment penalties.
The rules prohibit banks from levying these charges on floating-rate home loans extended to individual borrowers.
Procedure
Understanding home loan foreclosure
Home loan foreclosure refers to the repayment of the entire outstanding amount of a loan in one go, before time.
This enables borrowers to pay off their debt sooner and pay lesser interest over the life of the loan.
Foreclosure can be done at any time during the loan tenure, even after paying a few EMIs.
Process
Steps to initiate home loan foreclosure
Before proceeding with a home loan foreclosure, borrowers must inform their lender about it. This gives the lender time to prepare the required documentation and calculations.
In case of joint loans, all co-borrowers need to be present as their signature would be needed for processing the foreclosure request.
Borrowers must maintain adequate funds in their account to clear the cheque and help banks process closure requests quickly.
Regulations
RBI's guidelines on foreclosure charges
The RBI had issued a circular on June 5, 2012, saying banks cannot levy foreclosure charges or pre-payment penalties on home loans with floating interest rates extended to individual borrowers.
On February 21, 2025, the RBI proposed draft norms to abolish these charges for retail and Micro, Small and Medium Enterprises (MSME) borrowers.
Once approved, this will apply to all floating-rate loans including those given for business purposes to individual borrowers.
Considerations
Factors to consider before opting for foreclosure
Before going for home loan foreclosure, borrowers should consider tax implications as home loans provide tax benefits under Sections 24(b) and 80C of Income Tax Act, 1961.
They may lose these deductions if they foreclose the loan early.
Borrowers should also check applicable charges with their lender before proceeding as RBI's proposed guidelines will only apply to floating-rate loans.