Home Loan Myths – Top 5 Myths Every Borrower Should Know

Myths, as the name suggests, are the misconceptions and when we talk of home loan myths it is obviously about home loan. The rising income levels coupled with increasing aspirations have led to people buying a house very early in life. They take a home loan for it, which is easily available with most of the financial institutions. As most of the youngsters are tech-savvy, they make use of online tools like home loan calculator to know exactly how much they need to shell out in EMIs (Equated Monthly Instalments). This helps them in understanding how much loan amount they can afford and plan accordingly.

Factors That Lead to Home Loan Myths

A little research into the reasons led to the following three factors that are actually responsible for all the myths circulating about the home loan.

Lack of Knowledge: The employees working for a particular bank or HFC (Housing Finance Company), most of the times, do not have complete knowledge of the product they are selling. At times, they also try to withhold some important points just in order to close the deal. The ignorance of a potential borrower works to their advantage.

Half-Baked Information: Those around us often have half-baked information, which they pass with perfect confidence. If you ask them a particular thing, they will seldom say that they don’t know about it. Rather, they will give half facts along with adding a few things from their end, resulting in twisting the facts.

• Lack of Information on the Web: Most of the people today turn to the web to gather complete information. Unfortunately, they don’t get the entire thing at one place in an organised manner.

 

Top 5 Myths About Home Loans

Now that we know what leads to myths about home loans, let’s see what these myths are.

Myth 1: Choose the Shortest Loan Tenure

A borrower only has the flexibility to choose the loan amount and the tenure, interest rate being at the discretion of the lender. Making use of the housing loan EMI calculator, the borrower can thus play between these two to arrive at an EMI amount. If you choose the shortest loan tenure, the EMI is bound to go up, which puts unnecessary stress on the monthly finances. One should never try to close the loan quickly by opting for EMIs that are much higher than his or her comfort zone. The higher EMIs also prove to be detrimental in case you try to take another loan in future because of higher FOIR (Fixed Obligation to Income Ratio). Always opt for comfortable EMI payments and as and when you have surplus funds, try prepaying your loan either partially or fully.

 

Myth 2: Interest Rates Are Fixed and That Too by RBI

RBI (Reserve bank of India) just announces the REPO Rate, which is the rate at which it lends money to the banks in case they need it. It has no direct role in fixing the home loan interest rate. It just formulates the policy due to which the cost of funding for banks gets increased or decreased. The average cost of funds determines the base rate of the bank. Thus, only the base rate is fixed and one can negotiate with the bank to lend money at a slightly less percentage than the base rate. This negotiation can go up to 2-2.5% less than the base rate depending on your credit rating, strong repayment capacity, and loan amount. Make use of home loan interest calculator and see how much it impacts your total outflow at a particular rate.

Additional Read:  How Does Housing Loan Interest Calculator Work?

 

Myth 3: Foreclosure and Prepayment Will Lead to Heavy Penalties

This is the biggest myth circulating that deters the borrowers to go for it. The RBI instructions clearly state that no lender can charge any prepayment/foreclosure charges if the borrower has taken floating rate-based home loans. Making use of home loan calculator or home loan repayment calculator, you can calculate your actual savings in case you plan to prepay or foreclose it.

 

Myth 4: Home Loan Should Be Taken for Tax Deductions

Though there are tax benefits on home loan, one should not opt for it just for tax purpose. Take it only if you need it. If you fall in the highest tax bracket it is beneficial when it comes to taxation part, but to save tax, you are paying interest to the bank. For you, it is always a net outflow.

 

Myth 5: Fixed Interest Rates Are Better

There is always a strong debate between the fixed and floating rate of interest with most being biased towards the former. Either can be good or bad depending on the present market conditions. In case the repo rate and SLR (Statutory Liquidity Rate) are rising, the floating rate will increase and you will be at a loss. However, if you have opted for a fixed rate and the interest rates come down you will be stuck with your fixed rate. Thus, you will have to take a call based on the market conditions as both these options can prove good or bad.

Home loan is a long-term commitment that includes a considerable amount of money. Once you opt for a home loan, you will fix liability for a very long time. Thus, you should go for it only after due diligence. Make use of free online tools like home loan calculator to see if you are comfortable with the EMI amount that you will have to pay every month. However, even after deep research, you can never be 100% safe. Making an informed and intelligent decision will definitely mitigate the risk.

Read More: 5 Must Do Things on Home Loan Prepayment and Pre-Closure Procedure

 

Author Since: Jan 17, 2019

Anoop Bansal, a professional Chartered Accountant based in the National Capital - Delhi. I have worked for the top-notch Indian and International banking firms for the past 10 years. Currently, I work at emi-calculator.loan blog and a financial consultant for different SMEs in India. Follow me on Facebook, Twitter and Linkedin for more information.

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