Should you prepay your home loan early in Nepal? The foreclosure-charge math
NRB bars any prepayment penalty on home loans up to Rs 50 lakh. Here is the foreclosure-charge math, and whether to prepay a 9% loan or invest the cash instead.
A friend got his Dashain bonus last Kartik, Rs 4 lakh, and froze. He had a home loan running at 9%. Half of him wanted to throw the whole bonus at the loan. The other half had heard that banks "charge a 2% penalty if you pay early," and he did not want to hand the bank Rs 8,000 just for the privilege of clearing his own debt faster.
He was wrong about the penalty. On his loan size, the bank could not legally charge him a paisa to prepay. The real question was never the foreclosure charge. It was whether Rs 4 lakh does more work knocking down a 9% loan or sitting somewhere earning a return.
The foreclosure charge most people fear (and why it's usually zero)
The Rs 8,000 fear is the most common reason Nepali borrowers sit on cash instead of prepaying. It is mostly outdated.
Banks used to collect up to 2% of the prepaid amount as a penalty. Nepal Rastra Bank closed that door for ordinary home loans. Two rules cover almost every retail borrower:
- Loans up to Rs 5 million: no prepayment penalty at all. If your outstanding home loan is Rs 50 lakh or below, the bank cannot charge you to repay early, whether you do it in part or in full.
- Loans above Rs 5 million: no penalty if you prepay because of a rate change. If your bank raised your floating rate (or changed the agreed conditions) and you leave or prepay for that reason, NRB does not allow a penalty.
Two more protections sit behind these. Banks cannot vary the prepayment fee between similar borrowers by more than 0.25 percentage points, so there is no arbitrary "manager's discretion" surcharge. And if a bank charges more than it disclosed, you can complain to NRB; the bank must refund the excess and faces a fine.
So where does a penalty still exist? On a loan above Rs 5 million that you choose to prepay early from your own funds, for no rate-related reason, the agreement can still carry a fee. What that fee is sits in one line of your loan document, usually titled Pre-payment / Pre-closure charges. Find it before you assume the worst. For most salaried borrowers with a sub-Rs-50-lakh loan, the honest answer is that prepaying costs nothing.
Three ways to pay early, and what each costs
"Prepay" gets used loosely. Three different actions sit under it, and the cost of each is different.
| Action | What it does | What it costs (loan ≤ Rs 5m) |
|---|---|---|
| Partial prepayment | A lump sum on top of your EMI; principal drops, loan continues | No NRB-permitted penalty |
| Full foreclosure | Closes the whole loan early, releases the collateral | No NRB-permitted penalty |
| Loan swap / balance transfer | Moves the outstanding loan to a new bank for a lower rate | A service fee at the new bank, capped at 0.75% (commercial banks) |
Partial prepayment is the workhorse. You keep the loan open, drop the principal, and the bank either shrinks your EMI or shortens your tenure (ask which — some banks quietly cut the tenure and leave the EMI untouched).
Full foreclosure is the end state: you clear the balance, collect your lalpurja from the bank's vault, and release the mortgage at the Malpot. Get the no-dues letter and confirm the lien release in writing.
A loan swap is a different animal. You are not paying down the loan, you are moving it to a cheaper bank. That carries no prepayment penalty on a sub-Rs-50-lakh loan, but the new bank charges a service fee of up to 0.75%. Worth it only when the rate gap covers that fee inside a year or so.
Prepay vs invest: the only comparison that matters
Once the foreclosure charge turns out to be zero, the question is simple. Does the cash do more work cutting the loan or earning a return somewhere else?
Prepaying a loan is an investment. The "return" is the interest you stop paying. Prepay a 9% home loan and you have locked in a guaranteed 9% return, tax-free, with zero volatility. Nothing on the bank's deposit side comes close.
Run the three options on the same Rs 5 lakh:
| Where the Rs 5 lakh goes | Headline rate | What you actually keep (per year) |
|---|---|---|
| Prepay the 9% home loan | 9% | ~Rs 45,000 saved, guaranteed, tax-free |
| Fixed deposit | 6.5% | ~Rs 30,600 after 6% TDS on interest (net 6.1%) |
| NEPSE | Anyone's guess | +Rs 1,23,000 in a good year, a loss in a bad one |
The FD comparison is the cleanest. Commercial bank fixed deposits currently top out around 6.5%, and the 6% TDS trims that to roughly 6.1% in hand. A 9% loan prepayment beats that by almost 3 percentage points, risk-free. You would need an FD paying close to 9.6% pre-tax just to match what prepaying does, and no bank is offering that.
NEPSE is the seductive one. The index returned 24.74% in FY 2081/82, then crawled up only about 5–6% the following year amid political turbulence. A 9% loan prepayment does not care which kind of year it is. The 25-lakh case study on this blog walks through how wide that swing actually runs. If you would not take a margin loan at 9% to buy shares, you should think twice before holding cash at 6% while a 9% loan runs.
The base rate matters here too. The average base rate of commercial banks sat at 5.60% at the end of Ashwin 2082, down sharply from a year earlier. When deposit and lending rates fall together, the gap between your loan rate and any safe deposit return narrows further, which only strengthens the case for prepaying rather than parking.
There is no tax break for keeping the loan
This trips up anyone who has read foreign personal-finance advice. In India and the US, home-loan interest is tax-deductible, so there is a real argument for keeping a cheap loan running and investing elsewhere.
Nepal does not work that way. There is no income tax deduction for interest on a self-occupied home loan for individuals. The deductions a salaried borrower actually gets are for retirement-fund contributions (up to the lower of one-third of assessable income or Rs 5 lakh), life insurance, health insurance, and approved donations. Home loan interest is on none of those lists.
So the "don't prepay, the tax deduction makes the loan cheap" logic simply does not apply. Your 9% loan costs a real 9%. There is no hidden discount from the IRD waiting to make it cheaper.
When NOT to prepay
Prepayment is right most of the time. Not always. Skip or delay it in four situations.
- No emergency fund yet. A prepayment is money you cannot get back without re-borrowing, usually at a higher rate than your home loan. Build three to six months of expenses in liquid savings first. A prepaid loan does not cover a hospital bill or a job gap.
- More expensive debt is running. A credit card at 24% or a personal loan at 15% costs far more than a 9% home loan. Clear those first. Prepaying the cheapest debt while the costliest one compounds is backwards.
- You are near the end of the loan. Interest is front-loaded. In the last few years, most of each EMI is already principal, so a prepayment saves very little interest. The year-by-year math is in the EMI post. Late in the loan, the same cash often does more in an FD ladder.
- You would rather borrow against the asset than lose access to it. If you may need liquidity, a loan against your FD or shares at a low net cost can be a better use of surplus than locking it into the house, where getting it back means a fresh top-up loan.
A worked decision: the Rs 4 lakh bonus
Back to the friend. Rs 4 lakh bonus, a Rs 38 lakh home loan running at 9%, twelve years left.
His loan is under Rs 50 lakh, so the prepayment penalty is zero. Full stop. The Rs 8,000 he was bracing for does not exist.
If he prepays the Rs 4 lakh, he stops paying 9% on that slice from now until the loan ends. Because the interest is front-loaded and twelve years still run, that single prepayment knocks well over a year off his tenure and saves several lakh in lifetime interest. The exact figure depends on his amortisation schedule, but the order of magnitude is "a year of EMIs you never have to pay."
If he puts the same Rs 4 lakh in a 6.5% FD, he earns about Rs 24,400 in the first year after TDS. Useful, but it loses to the prepayment by roughly Rs 12,000 a year, every year, with no upside to compensate.
His emergency fund was already in place. He had no credit-card balance. He was nine years from the end, not nineteen. Every box for prepaying was ticked. He prepaid the full Rs 4 lakh, and the only thing he gave up was a slightly larger FD statement.
What you actually need to know
- The foreclosure charge is usually zero. For home loans up to Rs 5 million, NRB bars any prepayment penalty, and larger loans escape it too when you prepay over a rate change. Check your pre-payment clause once, then stop worrying about it.
- Prepay beats park. A 9% prepayment is a guaranteed, tax-free 9%. A 6.5% FD nets about 6.1%. There is no home-loan-interest deduction in Nepal to tilt the math the other way.
- Liquidity and costlier debt come first. Keep the emergency fund full and clear any 15%+ debt before throwing cash at the cheapest loan you have.
If you want a second pair of eyes on your own prepay-vs-invest numbers, send the broad shape (loan balance, rate, years left, surplus) to parjanya57@gmail.com.
This post is part of the Nepal Money Basics guide — the big-ticket-decisions section, alongside the EMI math and balance transfer posts.