Piramal Capital And Housing Finance Home Loan Foreclosure Details

What is a foreclosure?

A foreclosure is a financial tool through which an applicant can “close” his/her loan account in advance of the agreed repayment tenure by paying off the loan in its entirety at one go. The advance payment could be done as a one-time lump sum amount, or as an increased sum (increased EMI) for a shortened tenure. An applicant usually opts for a loan foreclosure when he/she has surplus funds available or has benefitted from an increase in regular income.

What is home loan foreclosure?

There are a few common scenarios in which home-loan borrowers choose to pay off their existing home loan before its decided tenure:

1. An increase in regular income: When a person with an existing home loan gets a promotion at work (for example) his/her salary/income increases. Consequently, he/she may decide to use this increased monthly income to pay off the home loan more quickly. There are specific clauses in home loan agreements that govern the repayment by sticking to a specific amount for a specific duration (tenure). This is a repayment renegotiation.
2. A sudden influx of a large amount of money: If a person with an existing home loan becomes the beneficiary or recipient of a large sum of money through either winnings/bequeathments/commissions/bonus, etc. – and if this amount is sufficient to clear off the remaining home loan balance, the person may choose to close the home loan and discontinue monthly EMI obligations.
3. Sale of the property: During repaying a home loan (average tenure is 10 years), property values may rise or fall. Since the value of the asset usually increases in the course of the tenure, the person who has taken the home loan may choose to sell it for a profit. He/she then closes the home loan with a lump sum and retains the remaining profit, if any.

What is pre-payment?

Pre-payment is a tool that allows borrowers to pre-pay the principal amount in part or in full before the end of the decided repayment tenure. It is usually done to reduce the outstanding amount or remaining term in exchange.  

What is a home loan pre-payment?

In the course of repaying a home loan, an applicant may have access to additional funds from time to time which he or she may choose to use to repay the home loan more quickly. If the borrower decides to pay an amount greater than the regular EMI in any particular month, he/she makes an agreement with the bank for that specific purpose and reduces the overall amount owed by the “extra” amount paid.

How to foreclose Piramal home loan?

If an applicant decides to foreclose his or her Piramal home loan account. First and foremost, it is advisable to connect with the Piramal Capital and Housing Finance or the dedicated relationship manager through Fincity/Piramal. Once the applicant expresses his/her interest in foreclosing the home loan account, the relationship manager calculates the remaining dues and other applicable charges (if any) and provides a quotation to the applicant. The quotation includes the remaining interest to be paid, outstanding balance, remaining tenure of the loan amount, and foreclosure charges (if any). If the applicant is satisfied with the quotation, he/she can pay the quoted amount and foreclose his/her account.

But as the applicant forecloses his/her account, there lies a potential loss for the lender as it will no longer be able to collect the due interest for the decided tenure of the loan. Therefore, some lenders levy a foreclosure charge.

 How to avoid an impact of the home loan foreclosure on the credit score?

A Credit score determines whether an applicant qualifies for a loan, based on historical behavior with credit. When a borrower decides to foreclose his/her loan account, it creates a negative impact on his/her credit score (because the loan was not paid off on the initial terms). To avoid a negative impact on the credit score, an applicant must do the following:

• Get an No Objection Certificate (NOC) from the lender or bank

If a borrower has decided to foreclose his/her loan account, it is important to collect the NOC from the respective bank or the lender. As the No Objection Certificate includes important details like – loan amount, amount being paid, date of disbursement, bank manager’s approval, and the outstanding amount. It provides a legal shield to a borrower foreclosing his/her loan account in case of any future error in the CIBIL report. Also, it shows that the applicant does not owe any money to the bank or lender.

• Get an Encumbrance Certificate (EC) from the Registrar

If a borrower decides to foreclose his/her home loan account, it is advisable to take an Encumbrance Certificate for the respective Registrar after receiving the NOC for the bank. An Encumbrance Certificate includes details such as – all the registered debts borrowed by an individual. It helps the borrower to avoid any errors like pending principal amounts or any additional charges. 

Foreclosure or pre-payment of the mortgage, helps a borrower to circumvents the interest liabilities and to get rid of the home loan obligation faster. It allows the borrower to reduce – if not fully eliminate – the burden of home loan interest. 

However, the banks or the lender levies certain charges or penalties to recover the potential interest revenue lost in the event of a foreclosure. If the borrower repays the loan amount well before the decided tenure, the bank loses out on potential interest revenue which in turn becomes a liability for the lender or bank.

Once the borrower forecloses his/her Piramal home loan, it is reflected in the credit report stating – cleared debt. It is important to inform CIBIL about the foreclosing of the loan account to make the necessary updates on the CIBIL report. 

Pre-payment/foreclosure guidelines as per RBI

According to the guidelines as per RBI, as officially stated verbatim: “It is clarified that NBFCs shall not charge foreclosure charges/pre-payment penalties on any floating rate term loan sanctioned for purposes other than business to individual borrowers, with or without co-obligant(s). The Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 and the Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 have accordingly been updated.” 

Before the mandate by RBI on August 2nd, 2019, a borrower had to pay an additional charge of up to 5% on the outstanding loan amount if he/she decides to foreclose his/her loan account. After the implementation of the RBI mandate, all the banks and lenders had to do away with all foreclosure (or pre-payment) charges in certain situations. Since then, a borrower can easily foreclose or pre-pay his/her loan amount on a floating rate of interest without any additional charges. 

If a borrower has availed a home loan at a fixed rate of interest, he/she might be charged 2% of the principal amount by the bank or lender. If so, it is advisable to switch the lender and opt for a home loan balance transfer to a bank offering a floating rate of interest. Piramal Capital and Housing Finance offer a floating rate of interest with affordable interest rates and Loan Top-up facilities on a home loan.

If a borrower decides to opt for the foreclosure facility at Piramal Capital and Housing Finance, he/she needs to consider these general practices:

• Under Section 80(C) and Section 24 of the Income Tax Act, 1961, foreclosing the loan account eliminates the chances of certain income tax deductions on the outstanding amount and interest rate respectively. 
• It is important to ensure the EMIs are not more than 40% of the applicant’s monthly income. If so, only then it is advisable to opt for a foreclosure or pre-payment of the loan account. 
• Also, it is advisable to plan the foreclosure of the loan account for better utilization of the surplus income.

Pre-payment/Foreclosure rules and guidelines Piramal Capital and Housing Finance.

The pre-payment/Foreclosure rules and guidelines for Piramal Capital and Housing Finance are stated blow:

• If a borrower takes a home loan for his/her personal use other than business purpose at a floating rate of interest, PCHF charges no penalties on foreclosing the loan account.
• If a borrower takes a home loan at a fixed rate of interest, he/she needs to pay 2% of the principal amount being paid plus other applicable charges.
• If a borrower pre-pay the loan amount in part or full from own source, no prepayment charges shall be applicable. Here, the term “own source” means any source other than lending money from any bank or financial institute.
• If a home loan is taken by a non-individual/business firm at a floating rate of interest, the borrower has to pay 2% of the principal amount of the loan being paid plus additional charges.

Pre-payment/Foreclosure best practices

If an applicant decides to foreclose or pre-pay the loan amount, it is important to calculate the benefits and disadvantages like – pre-payment penalties, to minimize the payout. It is important to take certain things under consideration, such as:

• Whether foreclosing the loan account saves more than that of the cumulative interest.
• Whether pre-payment would actually be more beneficial to the borrower’s individual scenario – considering financial planning, etc. Home loan borrowers mentally prepare to set aside funds for EMIs, and plan other expenses accordingly.
• Whether the money being used for the lump sum payout would yield greater returns as an investment rather than as a tool to pay off existing debt. If the lump-sum is used as an investment and yields greater returns than the interest rate on the loan, the borrower could earn a profit and still pay off the loan on its original terms.

After considering, if the applicant is still interested in foreclosing his/her account, he/she can do the needful to foreclose the loan account.

How to Pre-payment/Foreclosure your Piramal home loan?

Listed below are the step-by-step process of pre-payment / foreclosure of your Piramal home loan –

Step 1: If you are planning to foreclose or pre-pay your Piramal home loan, write an application informing the PCHF or your relationship manager about your decision. PCHF or your relationship manager will do the necessary changes in your tenure and repayment schedule, based on your decision.

Step 2: Make a list of the documents to be submitted during the foreclosing of your loan application – Aadhaar card PAN card, etc.

Step 3: Once you submit your foreclosure application to PCHF, your relationship manager will calculate the outstanding amount including the rate of interest and other additional charges (if any)

Step 4: You can pay the requested amount via cheque or Demand Draft.

Step 5: After the payment of the amount, PCHF will issue a NOC (No Objection Certificate), a No Due certificate and an acknowledgement letter stating the same.

Zero additional charges on Piramal home loan pre-payment/foreclosure

Piramal Capital and Housing Finance charges zero additional charges on pre-payment and foreclosure of the home loan at floating rate of interest with or without obligant(s).

FAQs

1. What is a foreclosure?

A Foreclosure is a tool through which an applicant can “close” his/her loan account in advance of the agreed repayment tenure by paying off the loan in its entirety.

2. What is the difference between foreclosure and pre-payment?

A pre-payment is done when a borrower pays his outstanding loan amount in part or full before the decided tenure whereas in foreclosure, an applicant “closes” his/her loan account in advance of the agreed repayment tenure.

3. Do I have to pay additional charges on a floating rate of interest?

As per RBI guidelines, if a borrower decided to foreclose his/her loan account, the bank or lender cannot charge any additional charges on foreclosing the loan account.

4. How can I foreclose my Piramal home loan account?

If you decide to foreclose your loan account with PCHF, you must consider these following steps:

Step 1: Write to your Piramal Home Loan relationship manager, or your Fincity relationship manager, and request a home loan prepayment or foreclosure application form.

Step 2: Gather the documents you’ll be required to submit (these will be communicated to you by your relationship manager)

Step 3: After the foreclosure application has been submitted, PCHF will calculate your outstanding amount including the rate of interest and other additional charges (if any)

Step 4: The amount communicated should then be paid off in whole or in part as decided between you and Piramal.

Step 5: After you make the payment, Piramal will issue a NOC (No Objection Certificate), a No Due certificate and an acknowledgement letter.

5. How can I get a No-Objection certificate on foreclosing my loan account?

If you have decided to foreclose your loan account, it is important to collect the NOC from the respective bank or the lender. You can ask your bank or lender to provide a NOC after foreclosing your loan account. As the No Objection Certificate includes important details like – Loan amount, amount being paid, date of disbursement, and the outstanding amount. It provides a legal shield to a borrower foreclosing his/her loan account in case of any future error in the CIBIL report. Also, it shows that the applicant does not owe any money to the bank or lender.

6. Where can I get my Encumbrance Certificate (EC)?

Once you have foreclosed your loan account, you can collect your Encumbrance Certificate from your respective Registrar after receiving the NOC for the bank.

7. Why getting an NOC and an Encumbrance Certificate important?

It is important to take an NOC and an Encumbrance Certificate after for closing your loan account. It provides a legal shield to a borrower foreclosing his/her loan account in case of any future error in the CIBIL report. Also, it shows that the applicant does not owe any money to the bank or lender. It helps the borrower to avoid any errors like pending principal amounts or any additional charges.