Closing a home loan and owning a debt free home is a dream come true. It is time to enjoy the rental income without any worry. But a home loan closure must be completed properly to ensure no further problems arise in future.
Jeeva is my neighbor in Chennai who had bought a house 10 years ago. He had pre-closed his loan 2 years ago.When he was about to sell his house last month, he was in for a rude shock.
The bank had returned the original documents 2years ago but had failed to remove the lien on mortgage entered on the house nor provide the No Object Certificate.
This prevented him from having an immediate sale and he had to get the pending documents. It is the responsibility of the bank to provide these documents once the home loan is closed.
In India, sometimes you don’t get unless you ask for them. So be sure to ask what you need. Let us now dive into what things you must do once you pay all your home loan installments and close your home loan.
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Home Loan Pre-payment
Home loan pre-closure is nothing but making your home loan debt payments to the bank in part or full before the tenure. A home loan is usually for 15 to 20 years and is one of best investment options . If you’re planning to close this before the scheduled tenure then you must let the bank or financial institution in writing.
Banks and housing finance companies usually charge a prepayment penalty if loan is closed ahead of tenure. Some banks do not levy this if you establish the source of funds used for pre-payment. This will involve furnishing your salary slips or ITR filing with bank statement.
Update: As per the new mandate of Reserve Bank of India, banks are not allowed to collect prepayment penalty anymore on floating rate loans.
This is a huge leap forward for consumer welfare and home loan borrowers. So you don’t need to pay anymore penalty. If your bank still levy a pre-payment penalty you can forward a complaint to Consumer Forum of India and Banking Ombudsman.
RBI Notification: Abolition of penalty by RBI
7 must do things on home loan closure
We have provided 7 points which you need to follow to complete the home loan closure. Points 1,2,3,7 are the most important. Don’t neglect or miss them at any cost.
1) Get back all the original documents
Once you have made all your payments, the Bank or Housing Finance Company will likely give you the original documents. You should make sure that all the documents you submitted with the bank when taking the loan are returned. Usually it will be the Title Deeds and Mother Deed (if applicable).
Don’t just check for document alone. Make sure that all the pages are present in good condition as well. I have seen instances where last page of sale deed went missing. In that case you need to arrange for the missing page which is a tedious process.
Make sure all the pages are intact in front of the bank official before signing on the acknowledgement of the bank.
Once you sign, you can’t undo it and banks usually won’t be responsive in this regard. It is usually a good procedure to obtain the documents from bank by visiting them than request documents by courier.
Tip: Once you get the originals scan them and keep a soft copy in a safe place.
2) Obtain No Object Certificate
NOC or NC is a No Object certificate which is a clearance certificate from the bank or housing finance company. This states that the Bank does not have any more interest in the property and its cleared by the bank after removing all hypothecation.
When you get this make sure the NOC clearly mentions the Property details (like address etc.,) , name of the borrower, home loan account number, date of loan starting and closure, amount borrowed and repaid(some banks don’t mention) .
Also a clause should be clearly mentioned that the borrower has paid all the dues and the property is now debt-free. This will make sure that the property is entirely yours now.
3) Remove lien on property from Registrar Office
In some cases where the credibility of the borrower is questionable, some banks might have created a lien. A lien is nothing but a transaction registered in the Registrar office which prevents you from selling the property.
If no lien was created, then there is no issue. However, if a lien was created then it is important to have this lien removed.
A bank official will accompany you to the Registrar office to terminate this lien. Remember that you will not be able to sell the property unless this is removed.
A home loan closure is incomplete without this process. This is what delayed things for my friend Jeeva mentioned in the beginning. It will take 7 to 10 days for changes to reflect in the Registrar accounts.
4) CIBIL Credit Update
Lenders do not show the same interest in updating CIBIL when loan is repaid as when loan is taken. Banks/finance institutions often delay or forget to inform CIBIL when a home loan is pre-closed.
A CIBIL score is nothing but proof of your credit worthiness. It takes 20-30 days to complete the process. Be in touch with your bank to make sure this is done (It’s likely you won’t get proper response J . A good relation with banker comes in handy). Once the bank informs its done, get an updated CIBIL report to make sure it is reflected in score.
Check out below two articles related to this process
5) Get legal clearance certificate from lawyer
A legal clearance certificate from a reputed lawyer is an optional attachment. Some people don’t prefer to get this. But we suggest you get this as this will speed up your process if you plan to sell the house. It also helps to get a legal opinion to make sure the home loan closure procedure is indeed complete.
6) Have a detailed track of loan repayments
It is advisable to keep a track of your bank statement which reflects your Loan EMI. If you made any lump sum prepayments keep a photocopy of the cheque/demand drafts. A handy tip is to maintain a file for all home related documents than put them in a cover.
Economic times article: Home loan closure
7) Obtain a new Encumbrance certificate from Registrar
This is a must do step. Once the bank has provided the NC and removed any existing lien, apply for an EC in the Registrar Office. An EC is nothing but a document with all financial transactions performed on the property.
Once the mortgage/loan is cancelled, it should be reflected in the EC. An EC is a very important document. So if the latest EC does not reflect closure of loan, approach the bank or Registrar for further procedure. Don’t neglect this step. This will complete the home loan prepayment procedure
Check you EMI : Home loan EMI calculator
It is not enough to just pay back your home loan. Make sure that you complete all the necessary procedure of home loan closure to avoid future problems. Close your home loan and enjoy your stay in the house peacefully. Cheers!
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