I have a home loan of Rs 55,00,000 at an interest rate of 9.5 per cent, originally taken for 25 years. I have already paid my EMIs for 10 years, and currently have a balance tenure of 15 years. How much would I need to pay if I decide to foreclose the loan now? What would be the total interest savings compared to if I continue with the current repayment schedule? Are there any penalties or fees associated with early foreclosure?
Answer: For you to take an informed decision, we need to consider a few factors:
1. Foreclosure Amount:
The foreclosure amount will depend on the outstanding principal plus the interest accrued until the date of repayment. If you decide to make the payment at the end of the payment cycle, then your outstanding principal would be Rs 46,01,818 after 10 years of paying an EMI of Rs 48,053. Also, any charges or unpaid fees will need to be included.
2. Total Interest Savings:
To estimate the amount you will be saving in interest, we need to compare the total interest you would pay over the 25 years versus the saving in the interest while closing the loan now.
The total interest amount you will pay if you continue for 25 years is Rs 89,15,995. On choosing to foreclose after 10 years, you will pay a total interest of Rs 48,68,216. Hence, the total interest saved by opting for foreclosure will be Rs 40,47,779.
3. Penalties and Fees for Early Foreclosure:
Penalties: Depending upon the loan agreement, banks will charge a penalty on the outstanding loan amount, which could be up to 5 per cent on fixed interest rates. However, the penalty charges will be levied on the fixed rate and not on floating interest rates.
Also, other charges like administrative fees and processing fees may also apply.
Foreclosure amount: 46,01,818 (We can calculate the foreclosure amount assuming that the loan amount was Rs 55,00,000, and the borrower has paid EMIs for 10 years without any additional payments).
Interest Saved through Foreclosure: Rs 40,47,779.
Penalty Assumed: 2 per cent in case of fixed interest rate.
Total foreclosure Cost: 46,01,818 + 2 per cent of 46,01,818 = Rs 46,93,854.
When considering foreclosure, you will end up saving a significant amount in interest. However, you will have to manage a large sum immediately to manage foreclosure along with the processing charges and penalties, if any.
For you to take a decision, it is important to analyse your current financial situation against the huge sum of money you need right now to settle your debts to enjoy a potentially long-term debt-free benefit.
(Atul Monga is the CEO and co-founder, Basic Home Loan)
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