An article on house loan from an IM reader

Pre-payment and Pre-closure penalty on housing loan:

Housing loans are one of the biggest mortgages you are going to take in your life. Taking a housing loan can change the direction or way of life of a middle class family. Since buying houses isn't like walking around the mall and grabbing them off the shelf, there is a particular science to it that you need to at least take the time to understand; consequence if you don't: Face a big hole in your pocket. For middle to low income group of people in India, it's not fun at all. Truly speaking how many of us have been given opportunity, even if it is given had patience to go through the loan agreement or offer letter or loan product brochure completely.

On availing Housing Loan we the borrowers pledging not only the house that we are buying or constructing out of that loan but also our rights to planning for our better future. All Financial Institutions are invariably charging rather imposing Prepayment or Preclosure penalty, normally 1 to 3%.

What I would suggest for middle income groups is to do a complete financial analysis before getting into a housing loan venture. Do a cash flow analysis for both outflow and inflow (i.e. for repayment of loan and your projected income) and do calculate Net Present Value of the entire cash flow, consider the stability of your income, and your future rental commitment if you choose not to buy a house, be realistic and do not be sentimental at all, since housing sector is commoditized and no more a worthwhile property. From my own experience am telling that we are very naive, when we buy.

The curse on middle class is 'we work to make others rich'

Government (when planning to revive the moribund housing sector) and IBA should come out with specific package to help small borrowers not the real estate giants, in order to completely waive Prepayment and preclosure penalty, since it affects the financial
planning of a common man. Banking institutions are NOT OBLIGATED under any law or contract (usually) to provide waivers of penalty fees to borrowers. It has to be amended, since lot more reasons are there to prepayment or preclosure of a loan to get rid
of a liability (Compassionate financial reasons - Natural disasters, personal economical problems, sale of ancestral property, accidents, etc.). The pathetic part is Under certain conditions the same penalty is charged to, where properties are sold at a loss (borrower's side) and the loan is transferred and taken up by another party with the same or larger amount.

It is advisable to borrow from a bank or housing finance company, wherever the prepayment clause or Loan Redemption charges is not harsh.
-Written by G. Kumaran

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