Home Loan Closure: Points to Consider Before Closing a Loan

Are you nearing your Home Loan maturity or planning to close it? Congratulations! It is a significant milestone that you have achieved in your life. However, before you officially close your Home Loan, there are crucial points to remember to safeguard your financial interests as a borrower and property owner. These key factors help you experience a smooth and hassle-free Home Loan closure procedure.If you pay off all your Home Loan EMIs on time and complete the repayment tenure as scheduled, the lending institution closes the loan account, called regular loan closure.Making Home Loan part / full payments before the end of the applicable tenure is called loan prepayment or foreclosure. Many borrowers consider foreclosure to relieve the debt burden sooner and save on the overall interest cost. This option can be a significant cost-saviour during the initial loan repayment tenure when the interest component in the EMI (Equated Monthly Instalment) is high.Go through this insightful post to learn essential considerations regarding Home Loan closure and complete the process effectively. Also read : What is Composite Home Loan?

As a borrower, you should be aware of these crucial aspects before starting the process of Home Loan closure.

• Sale and title deed
• Power of Attorney (PoA)
• Possession letter
• Loan agreement papers
• Payment receipts (if any)

1. Inform the lender Inform your lender that you are ready to complete your loan formalities. You may need to apply for loan closure to your lender in the prescribed format. The loan closure letter format may be available at the lender’s official website.
2. Check the prepayment cost If your question is "how to close a Home Loan early", you can consider loan foreclosure. However, lenders may impose foreclosure penalties on this. It is generally a percentage of the loan outstanding amount. Ensure you check the penalty levied by your lender before opting for this option.You should sign the Home Loan agreement after considering all the terms, including the part-payment, foreclosure fee, interest rate type and loan eligibility. No prepayment charges are involved for floating-rate Home Loans with renowned lenders.
3. Retrieve original property documents Collecting all the original property documents from the lender is among the most crucial steps in the Home Loan closing process. Your purchased property is collateral against the loan whenever you take a Home Loan. You need to submit your original property documents to the lender. When closing the loan account, check twice and find if the papers are complete. You can match the documents with the photocopies of your property documents. There should not be any missing or damaged pages.The checklist to collect the original property documents is as follows:
4. Obtaining a No Objection Certificate (NOC) A No Objection Certificate (NOC) , sometimes called a No Dues Certificate (NDC), relates to granting permission. In the case of housing loans, an NOC from the lender states that they have no objection to the ownership transfer of the property as there are no dues on the loan.This loan closure certificate contains crucial information, including the customer’s complete name, the property’s full address, loan amount, account number, and starting and closing date. After the final payment of your Home Loan, the lender issues the NOC immediately. It would be wise to keep photocopies of the NOC to avoid any dispute on loan or property.Ask the lender for an NOC form and submit it with all the required information. Ensure that you submit accurate information in the Home Loan closure letter. The lender issues the NOC certificate after scrutinising all loan account details and checking if all the EMIs are paid.
5. Check if the lien on the property is removed The lien against the property indicates that the lender has a right to your property until you completely pay off the Home Loan. It is a necessary lien for lenders to protect themselves from losses in case the borrower defaults on loan repayment. A lien is a barrier for a property owner who wants to sell their property. Therefore, ensure to cancel the lien against your property after loan disclosure.You may need to visit the registrar's office to submit the required documents, the NOC and the representative form received from the lender. Completing the process and removing the lien allows you to regain complete property ownership.
6. Obtain the updated Non-Encumbrance Certificate A Non-Encumbrance Certificate summarises all financial transactions on a property purchased using a loan and reflects the Home Loan repayment. The land registry in the state issues this certificate, ensuring that the property is free from any financial liability, liens or legal issues. You can obtain it by visiting the registrar's office in the respective state.
7. Check if your credit score is updated Timely repayment of the Home Loan can boost your credit score and indicate your improved creditworthiness. After Home Loan closure, check if your credit report reflects the recently paid loan payments. It may take a few weeks to update the credit report. If the report is not updated, you can apply to the credit bureau to update it.
8. Get updated bank statements regarding your loan repayment Receive the loan repayment statements from your lender. It proves that you have cleared all Home Loan dues in case any issue arises. Remember that the loan repayment process is only complete with the loan repayment statement.
9. Collect all the post-dated cheques Many lenders ask applicants to submit post-dated cheques for security against any missed monthly EMI. If you did not miss any Home Loan EMI and completed the repayment, ask the lender to return all those post-dated cheques.

Also read : Everything About Housing Loan Terminology

Closing a Home Loan can have both positive and negative effects on your borrowing capacity:

Debt-to-Income (DTI) ratio

Lenders take this ratio into consideration when determining your ability to repay a new loan. The lower the DTI ratio, the higher the chances of getting approved for a new loan. Lenders prefer a lower ratio to approve a loan, which indicates a sound financial position. A Home Loan closure reduces your debt burden and the debt-to-income ratio .

CIBIL / Credit score

Closing a Home Loan successfully during the stipulated tenure can impact your CIBIL profile positively. Timely repayment indicates financially responsible behaviour and can improve your score.However, there is also a negative aspect. Closing a long-term loan, like a Home Loan, where tenure can be up to 30 years, may result in reduced credit history and impact your CIBIL score negatively as lenders consider the length of your credit history to determine your creditworthiness. The longer the credit history, the better the credit score.

You can close your Home Loan early by prepaying your EMI. The amount you prepay gets deducted from your outstanding principal amount. It will have one of two effects: either it will directly reduce your EMI amount or reduce the tenure of your loan. If you wish to close your Home Loan early, you can request the lender to shorten the tenure.

Before you close your Home Loan, you should be aware of the Home Loan closure procedure. Here's how it goes:

• Inform the lender that you will be closing your Home Loan on a particular date
• Complete all the paperwork associated with Home Loan closure
• Get the No Objection Certificate (NOC) from the lender. It states that you have paid all the dues, and no balance is outstanding in your name.
• Remove the lien from your home.
• Collect any excess cheques that may be lying with the bank.
• Get a new Encumbrance Certificate showing that your property is not tied up in legal or monetary liabilities.
• Get all the property and other related documents from the bank.
• Check your latest credit report stating that the loan has been closed, which may take a while.

Closing your Home Loan may take a few days to weeks. Further, you might have to wait until the credit reporting agencies update your credit report with the latest status of your Home Loan .

If you close your Home Loan through partial or full prepayment, you may have to pay foreclosure or prepayment charges. It is charged as a fixed percentage of the amount prepaid. Apart from this, no significant charges are associated with Home Loan closure, except for incurring nominal charges related to certain paperwork. Also read : A complete guide on Home Loan Prepayment Charges

Before closing a Home Loan, understand the Home Loan closing process, documentation, and prepayment penalties before submitting the housing loan closing letter. Familiarising with all vital factors can help you confidently navigate the Home Loan closing process. Take the necessary steps to ensure the smooth processing of Home Loan closure. Also read : A Complete Guide to NRI Home Loans - Eligibility, Benefits and Features