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Biggest Myths Surrounding Home Loans

A home loan is the sum amount borrowed from lenders to buy a property, which either can be a piece of plot or a residential flat kept as security till the loan is cleared. Lenders generally cover as high as 90 percent of the buying cost of a property. Everybody likes to own a dream home, but passion and wish require great determination to turn it into reality. However, today, for you to realize this dream is way easier than earlier with the assistance of a home loan. You can even enjoy various tax benefits with a home loan and leverage the same to buy a residential property. However, like other financial instruments, home loans are surrounded by misconceptions. And many of you may get misguided by such misconceptions and suffer from the consequences. Let’s go through the most essential misconceptions linked with home loans here.

First of all, what’s a home loan?

A home loan is a fund borrowed from the lender to buy a property, which either can be a piece of land or a residential flat. Such assets are kept as security or collateral till the loan is cleared. Usually, the lender covers up to 90 percent of the buying cost of the property. Simultaneously, the remainder should be paid as down payment by you intending to purchase the property.

Note that, to decide to lend, lenders ensure to go through your credit score for a home loan. So, whether it is Kotak Bank, ICICI Bank or SBI home loan credit score is the most crucial component factored in by lenders.

Important misconceptions about home loans –

Listed here are some of the important home loan misconceptions, let’s go through the same one by one –

Misconception no. 1 – Home loan has a high rate of interest

Fact – The home loan interest rate is the function of credit repayment tenure. The higher the time you take to repay, the higher will be the rate of interest. If your credit score is good, you can avail home loan from any lender may it be SBI, Tata Capital, HDFC, Bank of Baroda, etc at low-interest rate starting from just around 8 percent per annum. In case your credit score is low, then you can consider opting for a home loan through HFCs like Tata Capital. Bajaj Finance, Muthoot as these lenders do not emphasize the importance of your credit score.

Misconception no. 2 – Borrowers are penalized for loan prepayments

Fact – This is untrue. It differs from one financier to another. For example, in the scenario of a home loan process at a floating rate of interest, zero prepayment fees are charged in the case of floating rates; however, in the case, the consumer chooses fixed interest, charges might apply for loan repayment before the tenure completion.

Misconception no. 3 – RBI determines the home loan rate

Fact – Yet another misconception circulating regarding home loans is that the RBI or Reserve Bank of India fixes the home loan rates. While the central bank decides the major rates, banks determine the final rate of interest based on various parameters. And owing this, distinct lenders levy various home loan rates and endow you with different options.

Additional Reading: Credit Score for Home Loan

Misconception no. 4 – Short-term tenure is better

Fact – Many of you have this myth that the sooner you get yourself free from the home loan repayment schedule, the better it will be for you as you will require paying a lesser interest constituent. However, many of you fail to realize that with lower repayment tenure, you will even have to endow higher EMI (equated monthly installment). High EMIs might become tough to repay at a specific time point and payment failure might entice punitive measures from lenders. Thus, as an individual, you must decide the home loan tenure based on your assets, earnings, job stability, and future goals.

Misconception no. 5 – Credit score is just the basis utilized for home loan issuance

Fact – While a strong credit score does assist in authenticating your credibility as an individual, it is not just the only parameter used for deciding whether your loan would be approved. Besides a strong credit score, other important parameters that impact your eligibility for a home loan involve job stability, financial liabilities, employment status, age, etc.

Misconception no. 6 – Low home loan interest rate is just the only parameter factored in for availing a home loan

Fact – You as a borrower may instantly be attracted to lenders offering the lowest rate of interest present in the market. You may base your decision entirely on the low rate of interest without evaluating other important loan factors. A lender levying a lower rate of interest might be levying higher processing charges, prepayment fees, and other additional fees. It is thus important for you to review the distinct loan terms holistically.

Misconception no. 7 – RBI (Reserve Bank of India) fixes the rate of interest on your home loan

RBI or Reserve Bank of India, is responsible for fixing the broad market rate of interest, however, it is not responsible directly for deciding your home loan rate of interest offered by individual lenders. Various lenders like banks or HFCs set a rate of interest on home loans that they provide based on fund cost. Thus, home loan rates might differ across lenders.

Misconception no. 8 – Fixed home loan rate is better than floating home loan rate

While the fixed home loan rate provides certainty about the interest constituent to be paid each month, it does not provide any flexibility of lower rates in the case of a downward reset of the interest rates by the lender.

Misconception no. 9 – Availing a home loan means property title authentication

This is one of the major misconceptions linked with home loans. While the lender conducts the due diligence on documentation and various other crucial aspects of the property, it is the only responsibility of you as the property buyer to authenticate the title deed of the property.

Misconception No. 10 – Home loan prepayment is the best decision

In the case of excess funds, you as a home loan borrower may be tempted to instantly prepay the loan. However, is a prepayment of your home loan a good option? Home loan repayment and interest constituent, both qualify for tax deduction, which you as a borrower may use to lower your tax payment. Also, as the home loan interest rates are usually low, you as a borrower can use the excess amount to invest in the assets to earn a higher return rate. Thus, making prepayment is not just the best policy, in contrast to the most common belief.

Availing a home loan is a major long-term commitment, which must be undertaken by you post proper due diligence. You must assess all the important home loan aspects before choosing a specific product.

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