Design credit: Vishnu Madhav A.
Wanting everything isn’t a bad thing, is it? When it comes to investments – we’re constantly looking for options that are risk free, ensure high returns and also beat inflation! One option that matches the criteria is investing in real estate. Want proof? In 2011, even when equities took a huge hit and the Sensex fell by 25%, the prices of real estate in most Indian cities stayed the same despite the general economic unpredictability.
However, with soaring real estate prices, it is not only difficult but also unwise to buy a house only through your savings. Opting for a Home Loan is the better choice as it will allow you to repay the loan amount in affordable EMIs. Be wary since every Home Loan scheme comes with its own terms and conditions. You must be well-informed even about the small clauses or you will end up losing more than what you get.
But don’t worry. We’re here to debunk some of the common misconceptions about Home Loans and to help you clinch the best deal.
Myth 1 – Increase in Interest Rate Translates to Inflated EMIs
Simple math, right? NO! Whenever a bank revises the base rate, the knee-jerk reaction of many borrowers is the anger that the increase in the interest rate will cause chaos in their monthly budget.
Ah, but this might just be the biggest Home Loan myth ever. In line with the interest rate changes, the tenure could fluctuate over an interest rate cycle. In fact, banks generally extend the tenure to keep the EMI amount unchanged in case there is an interest rate change. By default, it is the tenure that is extended to keep the instalment amount the same. Try using an online Home Loan EMI calculator to get an idea of how your repayment will progress over the tenure.
Pro Tip – If you do not want to prolong the tenure, you just have to inform your bank that you are okay with servicing a higher EMI. Keep in mind that you are actually hurting your finances by extending the loan tenure as you will end up paying a lot more in interest. Try to prepay your loan in parts or refinance the loan to reduce your tenure.
Myth 2 – The Deal with the Best Interest Rate must be the Best Deal
While the cheapest detergent powder might be a good detergent powder, you cannot apply the same logic to Home Loans. Dig deeper to ensure that your lender is indeed giving you the best deal. Check out the valuation charges, prepayment penalty & processing fee in addition to the interest rate. At first glance, the deal might look tempting, but it might not be flexible or might come with higher fees.
Pro Tip – Think about the Home Loan features that will best suit your finances and objectives before you zero in on a lender. Compare Home Loan options before you apply for one!
Myth 3 – Borrowers must always opt for a Shorter Tenure and try to Close the Home Loan Account as soon as possible
Most borrowers opt for the shortest loan tenure possible for Home Loans to avoid repercussions from an increase in Repo rates by the RBI. But think about it; shorter tenures also mean higher EMIs and you risk facing liquidity issues if you don’t manage your money carefully. Instead, try to save some money side by side and invest in options that give returns of at least 12% to 15% which are normally greater than the 10.5% to 11.5% interest that you pay on your Home Loan.
Pro Tip – Diversify your investment portfolio! Pay off your Home Loan debt early by investing some money in other products rather than increasing your EMI by reducing the Home Loan tenure.
Myth 4: “It is the bank’s responsibility to ensure that I can afford my repayments”
So you have submitted your bank account statements, salary slips, Form 16, PAN card, among other things. Now, you might think it is the lender’s duty to make sure your repayment capacity is good enough to be offered a Home Loan deal. But, who will know your finances better than you do? There is no denying the fact that it is a mutual responsibility and both you and your lender must decide if you can afford it. But remember, you cannot blame the bank if you are not able to pay your EMIs in the future.
Pro Tip – Do your math! Think about the future and do not plan for an Italian-style villa if all you can afford is a 3BHK. Use a Home Loan EMI Calculator to see if you can fit the EMI in your monthly budget.
Additional reading: How your Home Loan eligibility is calculated
Myth 5 : A Good Credit Score means assured Home Loan approval
This is one of the most common misconceptions when it comes to applying for a Home Loan – “But my Credit score is 800 – why would I even think about Home Loan rejection?”
Fortunately or unfortunately, your Credit Score is a just one component of your application. Banks consider a number of other factors to assess your creditworthiness like income, repayment history, Credit Card limit, age and co-applicant’s profile.
Pro Tip – Always check your eligibility for a Home Loan scheme before applying. And psst, do not worry if your Credit Score is low. Here are a few secrets to improving it.
Myth 6 : Fixed interest rate means the interest rate will remain fixed throughout the tenure
This is the biggie among all the Home Loan myths and this is why we insist you read the fine print carefully. Many borrowers think that Home Loans with a fixed interest rate remain guarded from fluctuations. But, almost all Home Loan schemes come with an ‘interest rate reset clause’ that explains how the interest rate change at a future date is at the bank’s discretion. The reset clause empowers the lender to change interest rates under some circumstances and allows banks to review it at the end of certain periods. Also, note that most banks offer a fixed interest rate only for a certain period, which is usually 3-5 years. After this period, the loan automatically becomes a Floating rate Loan.
Pro Tip – Always read your Home Loan document carefully and discuss your concerns with the bank before you zero in on a loan scheme.
We hope we’ve cleared up any misconceptions you may have had about Home Loans. And if a Home Loan is what you’re looking for, try BankBazaar. We’ve got loads on offer!