Common Home Loan Myths
Home loans are gaining popularity as a convenient way of funding property purchase. However, many times home buyers fall prey to misconceptions and myths associated with a home loan if they have only half-baked information. This affects their decision of choosing the right loan offer among the myriad options. Here is the list of the most prevalent home loan myths that you need to be aware of.
Myth 1: Good credit score guarantees loan approval
Your credit score is one of the several factors that is used for determining creditworthiness. Other major factors including your age, monthly income, employer profile, job stability, existing EMI commitments, location, property title, etc. Each of these also plays a crucial role in assessing your credit profile. Failure to meet any of these criteria will lead to rejection of your home loan application.
Myth 2: It is best to opt for a short tenure loan
A home loan is a long tenure loan. The borrowers remain indebted for a long period. Most of the first-time buyers believe that it is better to opt for short tenure loans. But people who choose short tenure loans end up paying high Equated Monthly Instalments (EMIs). High EMIs can seriously affect your monthly budget, leaving you with little to no room to save anything for financial emergencies. Thus, while short tenure loans help you become debt-free at a rapid pace; they are not necessarily ideal. So, it is best to opt for a mid-tenure loan with mid-range interest rates and affordable EMIs.
Myth 3: Lower interest rates are better
Usually, borrowers opting for home loans look at the interest rates to make their decision. However, the interest rate is one such factor, with other important determinants being processing fee, loan tenure, and LTV (loan-to-value) ratio. For example, by charging a lower interest rate, the banks and other financial institutions may hike their processing fee or even lower the LTV that increases the overall down payment amount. So, it is always better to evaluate all the parameters before applying for a home loan.
Myth 4: RBI fixes interest rates on home loans
The Reserve Bank of India (RBI) is responsible for fixing the broad market interest rates. However, it is not directly responsible for fixing the interest rate on home loans for individual lenders. Lenders including housing finance companies, banks, etc. set interest rates on home loans based on their cost of funds. Thus, the interest rates on home loans vary across financial institutions.
Myth 5: Fixed interest rates are better than floating interest rates
Most of the borrowers choose the fixed interest rate, considering them to be better than the floating interest rates. They believe that since the market is unpredictable, it is better to stick to the fixed interest rates. However, floating rates are generally better than fixed interest rates. Firstly, the floating rates are usually lower than the fixed interest rate by 1.5% to 2%, which results in a lot of savings over the entire loan tenure. Secondly, even if there is fluctuation in the interest rate, the effects are not long-term. Thus, if you opt for a floating interest rate, you can save a more.
Myth 6: Lenders levy heavy penalties on foreclosure and prepayment
Another myth surrounding home loans is that the banks and other financial institutions levy heavy penalties and fees while doing prepayment or foreclosure of loan. This is not true. According to the instructions by the Reserve Bank of India, they cannot charge any prepayment/foreclosure charges on floating rate-based home loans. However, such charges may be levied on fixed rate-based home loans, which may vary across the financial institutions.
Myth 7: Direct loan applications are better
Most of the borrowers reach out to multiple lenders to shop for the best deal. However, every time you make a direct loan application with a bank or a housing finance company, your credit score would be affected by a few points. This is because whenever you file your application, the lender will contact the credit bureaus to fetch your credit report to evaluate your creditworthiness. Therefore, it will be better idea to visit an online FinTech portal to apply for home loans. The credit inquiry done by them is considered as soft inquiry which will not affect your credit score.
Myth 8: Getting a home loan authenticates the title of the property
This is one of the biggest myths regarding home loans. Though the lender conducts due diligence on the documentation and other aspects of the property, it is the sole responsibility of the property purchaser to validate the authenticity of the property’s title deeds.
Myth 9: Interest will automatically change with change in repo rate
Repo rate is the rate at which the RBI lends to the commercial banks. The change in the repo rate may not significantly change the average cost of funds to the banks. In case of an upward revision on the repo rate, the interest rate on the floating-rate home loans may not necessarily get changed.
Myth 10: Banks do not negotiate interest and charges
Some borrowers believe that the interest rates offered for home loans are not negotiable. That is not the case. If you are not satisfied with the interest rate quoted by the lender, you can negotiate with them for a lower interest rate, provided you have a valid basis to do so. For example, if you have a high credit score or a strong repayment capacity, you may negotiate with the lender to offer a lower interest rate and better service terms. Moreover, in case the lender refuses to do so, you may consider changing your lender.
Myth 11: Property insurance is not the borrower’s responsibility
Most of the housing loan contracts clearly state that the property must be protected against natural calamities like fire, floods, etc. The bank can add the cost of property insurance to the home loan borrowed by you. Accordingly, you will have to pay the premiums along with your monthly installments. To avoid confusion, make sure that you have a talk with the bank about property insurance and come to a common ground. Otherwise, you might end up spending a lot of money.
Myth 12: Interest rate hike directly implies escalated EMIs
The hike in the home loan interest rate by the RBI does not mean your existing home loan’s EMIs will automatically escalate, which will disturb your monthly finances. In such cases, lenders usually extend the loan tenure to avoid an increase in your monthly EMIs. However, since extending the loan tenure results in an increase in the overall interest payout, borrowers should pay higher EMIs if they are financially capable of it. Also, the hiked interest rate is applicable only at the end of your home loan’s reset period. Moreover, existing borrowers can opt for the home loan balance transfer in case they are confident of substantial savings by changing their lender.
