Home loans are secured advances provided by banks or financial institutions to help common people fulfill their desire for a dream house. However, being a long tenure loan, which you avail against the mortgage of your very own dream house, makes it a life-impacting decision for any individual. Comparing and choosing a home loan is a relatively complex and multi-dimensional exercise which leaves a common borrower prone to fall into the trap of a few prevalent home loan myths. Here’s a quick read for you to burst all the prevalent common myths about home loan you should not believe in to ensure that you are a happy borrower.
Myth # 1: Low-interest rates should be the first lookout
Whenever we look for a housing loan , home loan interest rate is the first factor that we use as a parameter for choosing the bank or financial institution. Banks and HFCs use low-interest rates as a marketing tactic to attract potential borrowers. However, one should understand that the interest rate depends on several factors such as credit history, loan amount, income, occupation, gender, timely repayment, etc. and hence, very few might be eligible to get a loan at the lowest rate. Further, while the bank may offer a low-interest rate, it may levy additional charges that may add up to the total cost of the loan. A bank with a low-interest rate may charge a higher processing fee and technical charges. The bank may make it mandatory to buy a home insurance policy from the bank only, with no or limited option to avail cheaper insurance options elsewhere.
What does this imply? This implies that as a borrower, one should never rely on interest rate alone to take a home loan decision and do a more detailed assessment of other associated fees and charges.
Myth # 2: Credit history needs to be flawless
A healthy credit history is a basic eligibility criterion for getting a home loan. One of the most common myths that one hears everywhere is that a loan application will be rejected if one’s credit score is less than 750. While this may be true for an unsecured loan, it is not the case with the home loan. A home loan is a secured loan, offered against the security of a property. Hence, bankers are willing to accept a few minor defects in a borrower’s credit report and, in most cases, are fine with a credit score of 600 and above. Further, having a credit score lower than 600 also does not mean your application for a home loan gets automatically rejected. Always discuss with the bank to work out appropriate mitigants.
The bank may offer an alternative like asking for additional documents as proof of a borrower’s creditworthiness or for a co-applicant with a high credit score to reassure the bank on loan repayment. If possible, you can defer your purchase for some time and work on building your credit history by timely repayment, clearing debts, and in many other ways. A slow and steady approach to improve your credit score is always a healthier option vs. opting for quick fixes with credit repair agencies.
What does this imply? It implies that keeping a regular check on your credit score is crucial to preserve your chances of getting a loan at best rates as and when required. However, a low score doesn’t always take away your chances of buying your dream home.
Myth # 3: Short tenure loan is always prudent
Home loans are available for a tenure of up to 30 years. However, Indians being traditionally debt-averse are attuned to believe that debts should be minimized, and it is wise to get rid of debts sooner. Choosing a shorter tenure loan means paying higher EMIs every month. Home Loan EMIs are typically large payments that may strain one’s monthly budgets. Pressurizing to pay higher EMIs can harm your future financial goals as a constant strain on your monthly budget prevents you from investing your money anywhere till you clear off the home loan debt.
What does this imply? It implies that one must carefully choose the EMI and corresponding loan tenure at a monthly amount one can comfortably service from their monthly income flows and keep buffers for making investments, maintaining a comfortable standard of living, and meeting emergency fund requirements.
Myth # 4: Opting for the fixed rate is better than floating rate
It is a common notion that fixed interest rates serve as a better option than floating interest rates. This arises from the fact the borrowers feel comfortable paying a fixed equal amount of EMI every month, which is not impacted by any rise and fall in interest rates. Contrast this with the floating-rate loan, in which interest rates are linked to the market, which allows the borrowers to adjust the cost of home loan to market trends. Imagine a situation where general interest rates in the economy are declining, and you are saddled with a high-cost fixed-rate loan. Especially more as fixed interest rates are usually 1% to 2.5% costlier than the floating interest rate. Further, there are very few banks that offer a pure fixed-rate loan. Most banks offer a mixed rate system, i.e., the interest rate remains fixed during a certain tenure, and a floating interest rate is charged after the tenure ends.
What does this imply? It implies that it is a myth that one is better off with a fixed-rate loan is misguided. If you are aware of the market rate trend, it is advisable to opt for a floating interest rate, especially when you can predict a fall in market rates.
Myth # 5: Transferring your home loan is costly and cumbersome
Most people have a misconception that if they foreclose a home loan, the bank will levy a penalty charge. As per the updated guidelines of the Reserve Bank of India, NBFCs and HFCs are restricted to penalize for any prepayment on floating interest rate home loans. In fact, HFCs are not allowed to penalize on fixed-rate loans as well, if an individual borrower makes the prepayment from his own resources. More than 90% of the borrowers today are on floating-rate loans. Hence, it is clear that one won’t be charged a penalty by most banks and financial institutions if you clear off your debts to close the loan early.
What does the imply? It implies that it is advisable to take a long tenure home loan without disturbing your monthly budget, even if you believe you will have funds to repay earlier. After all, there are no prepayment charges for the majority of home loan schemes in India. Remember to be mindful that you take a loan which has no prepayment penalties.
Keeping in mind the above facts and taking a well-informed decision with the help of home loan eligibility calculator can turn a home loan journey into a happy journey for home loan borrowers towards their dream home.