When taking a home loan, you should be well aware of the terms, conditions and general procedures. But problems begin when we start relying on things we hear from people who probably have less knowledge about a home loan than you. Then why do we believe in such home loan myths instead of looking for answers from credible sources?
In the following article, we will discuss with you the common myths prevailing in India in regard of home loans and then we will bust those myths by establishing facts.
A hike in interest rates would mean inflated EMIs
Most borrowers are under the impression that a hike in the bank’s base rate means a rise in the home loan rate and as a result their EMIs will go up. Enter panic mode. What are we going to do now?
This is perhaps the biggest myth of all myths ever, especially when the rates are hardening. What happens in reality is that most banks subject to conditions usually extend the tenure of the loan and keep the EMI amount unchanged. Over an interest rate cycle the tenure could go up and down in line with the changes in the applicable interest rate.
However, the decision of the EMI amount depends upon factors like the age of the borrower and the property, his/her income and so on. By default it’s the tenure that is extended and the EMI amount sees no effect. Therefore, if you do not wish to prolong your loan repayment, you need to inform the bank about your willingness to service a higher EMI. The choice is yours; you can do whatever suits you best. Click here to read about How many home loan can i take under my name..
Myth 1 busted!
Pre-Payment of Home Loan will definitely attract a penalty
No, this is not true!
Typically, it is levy during the initial 3-5 years of the loan. The charge levied declines over time. The nature of course varies as per the bank or the financial institution.
Some banks may choose to charge it but some may not. So you don’t need to bother over this. Speak to your banker first!
If you choose to repay the loan out of your own funds then you will have little to lose. As long as you have not opted for a home loan refinance from another lender most financial institutions ignore the prepayment penalty.
Most institutions allow up to 25% of the outstanding loan amount to be part prepaid in a financial year, but will charge from you 2% to 4% for any amounts paid over the specified limit of 25%.
So you really don’t have too much worry about it. Now-a-days pre-payment penalty is abolished.
That’s Myth number 2 busted.
A home loan with the lowest rate of interest is the best you can get
It may mean lower EMIs, but it may not serve your purpose if the loan amount sanctioned to you does not meet your requirement. So don’t run towards the loan with the lowest interest rate. If your loan eligibility as per the lender’s evaluation norms falls short, the low interest rate will be little consolation. Also, you need to go deeper to ensure that the bank is indeed offering you the best deal. we would like to suggest customers to study charges like processing fee, inspection and valuation charges and then making their decision. While some banks charge a flat consolidated fee, others break it up into several categories.
At the entry point, the rate might look attractive, but there could be a number of strings attached such as higher fees, penalties on pre-prepayment and lower or no flexibility.
So study all the terms and conditions carefully and don’t just blindly choose the low rate loan. It might not be what you want.
With this, we bust Myth number 3.
A longer term of home loan is better because the EMI is lower
People aim on keeping their EMIs low as low as possible. Which convert into a longer duration of home loans. A higher EMI means a shorter duration. But higher EMIs scare people off easily and they end up concluding that a long term home loan will be more beneficial to them. However, it is not necessarily true.
When combined with all the other factors, it is advisable to pay a higher EMI on a short term loan than pay a lower EMI on a long term loan. The main thing is to strike a perfect balance that suits your needs best, even if it has a slightly higher EMI.
So please make sure you consider each and every factor before you make a decision. Ideal home loan tenure is different for different people, so there is no standard rule here. Click here to read about Teaser home loan.
And that’s Myth number 4 busted!
Shifting to another bank means repayment from scratch
No, not at all! This is too common misconception.
And it leads individuals to continuing in the same bank despite having an opportunity to avail the benefits of an improved product in a different bank.
It is a wise for an individual to switch banks if he is getting a product that fits into his requirement.
It is a misconception that he will have to start repaying the loan from scratch. The new bank will just have to prepare an amortization schedule (which is a breakup of principal and interest) which would be the case even when your current bank has any rate changes. While changing banks ones principal component would remain the same only the interest component would reduce which is a huge saving. The key is to work out what product type and features best suit your financial needs and objectives first and then focus on the cost. So don’t worry, just go for what saves money and suits you best.
And that is Myth number 5 busted!
Now that we have cleared so many of the common misconceptions, we hope you’re feeling a lot better and well informed.
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