Myths about Home Loans

30 October, 2018      Home Loans

There was a time when even thinking of buying a house in your 20s would have surprised people, let alone actually buying one. However, ambitious mindsets have inspired youngsters to invest in property very early in their lives.

There was a time when even thinking of buying a house in your 20s would have surprised people, let alone actually buying one. However, with increasing income levels,ambitious mindsets and the aspiration of a better and self-dependent life have inspired youngsters to invest in property very early in their lives.  However, there are quite a few misconceptions or myths surrounding home loans which can easily misguide today’s youth. One can easily fall prey to the following misconceptions and it is wise to understand these facts clearly.

1. RBI Fixing the Interest Rate of Home Loan: 

Most people believe that RBI fixes the home loan interest rate. RBI has no direct role in fixing the home loan interest rate, RBI only decides the repo rate which is the rate at which the central bank of a country (RBI in case of India) lends money to banks for short period by buying their securities (financial assets). In the case of home loans, RBI’s contribution is only the formulation of policies that increases or decreases the cost of funding for banks. Hence you should not be worried if there is any policy change in the RBI rate formulation as it may not even impact your monthly EMI’s.

 2. High Cibil scores guarantee home loan approval:

Another prevalent home loan myth is that if your Cibil score is high, you can easily get a home loan approval. There are a lot of factors which decides your eligibility for a home loan and the Cibil score is one such component, but not the only one. It is always better to have more than one credit report justifying your score.  However, you can take the help of reputed credit bureaus that offer credit reports to ensure that there is no mismatch in the credit score, as it might lead to disapproval of your home loan.

3. Interest rates are non-negotiable

Another common myth for borrowers is that interest rates are non-negotiable. You can negotiate with the lender for a lower interest rate if you have a CIBIL score of 700 which is indicative of good credit history or you have a strong repayment capacity. Lenders often agree to fix interest at discounted rates. Such discounts may seem insignificant but may lead to substantial savings on the overall home loan paid. You should compare home loan rates online on financial marketplaces to find the most profitable loan offer for your home loan.

4. Shorter Tenure is The Only Option:

 Many individuals are of the opinion that shorter the loan tenure, the better it is. Shorter loan tenure implies higher monthly instalments which may stress your finances and may take a huge dip in your monthly savings. Besides, your credit approval chances are also at risks due to a higher FOIR (Fixed obligation to income ratio). Instead of burdening their finances with higher EMIs, borrowers must opt for a long-term tenure home loan with smaller EMIs with the higher flexibility of prepayment of debt and reduced financial burden.

 5.Opting Home Loan for Tax Deductions:

 Generally, one of the main attractions to avail Home Loan is a home loan tax deduction. This myth is usually because of wrong selling and incorrect representation of facts. In a lot of cases, this idea forces a buyer to avail Home Loan even though he is not in need of the same. Home loans help in some cases wherein husband and wife who are in are in the highest tax bracket avail joint home loan for the joint property. In such cases, it might be financially beneficial to avail Home Loan.

6. Penalty charges on prepayment and foreclosure:

 Another myth around home loans in India are any prepayment or foreclosure levy heavy penalties. But this is not true.  Typically, pre-payment charges are levied during the first three to five years of the home loan and the charge levied declines over time. The charge levied continues to goes down over the tenure of the loan. It completely depends on the nature of the financial institution - some banks or lenders may not charge for pre-payment, some may.  In case you choose to repay the loan out of your own funds, you will not be affected by such charges. Usually, most banks or lenders waive off the penalty for pre-payment unless you go for refinancing from a different financial institution.

We all know that buying a home may be one of the most important financial decision of your life as it takes a lifetime of financial planning and investment. Therefore, myths should not cloud such an important decision. Apart from analysing the loan offers, it is useful to spend some time clearing out the doubts before this all-important investment decision.