A home loan is a loan that you can take to purchase a new real estate property. Unlike other loans, housing loans come with a truckload of myths. These myths result from vague information spread because of the lack of understanding about housing finance or generalizing the loan based on experience with a certain bank or NBFC. Thus, it becomes important to inform people about what a home loan is about and bust its myths.
Below in the post, we have busted some of the common myths about home loans in India.
- A Bad Credit Score Disqualifies You from Taking the Loan
A credit score of 650+ does improve your chances of getting a home loan approval. However, it is untrue that you cannot take a loan if your credit score is lower. You may qualify for the credit facility at a few banks and NBFCs other than the mainstream ones. But, the interest rate charged will be higher than the standard rate of interest.
- Choose a Housing Loan with Lowest Interest Rate
No wonder that interest rate affects the total cost of a loan, but there are other factors to consider as well before finalizing a loan scheme. These factors include loan processing charges, origination fee, documentation charges, stamp duty, taxes, etc. Sometimes, banks charge a lower rate but higher processing charge, which offsets the loss of charging a lower interest rate.
So when comparing housing loans compare all the costs, including the hidden ones and not just settle for an offer with the lowest rate of interest.
- Home Insurance is Necessary to Avail Funds
It is optional to purchase a home/property insurance to be eligible for a home loan. A home insurance does make it easier for you to qualify for the loan as it offers an additional security to the property. Some financial institutions make it compulsory, but taking out property insurance may not be mandatory. You must go through the terms and conditions by a bank/NBFC regarding home insurance clause to understand the loan requirements better.
- Higher Income Will Get You a Higher Loan Amount
Belonging to a higher income bracket can make you eligible for a higher loan amount, but only if existing financial liabilities are low and the debt to income ratio is as per the expectation of the bank/NBFC. Usually 50% to 60% of your net monthly income must be disposable. If you have too many ongoing loans, wherein you are left with hardly any disposable income, then chances of securing a higher loan amount are lower, despite of a higher net monthly income.
- RBI Solely Decides the Home Loan Interest Rates
Indeed the Reserve Bank of India does influence the interest rates on loans by decreasing or increasing the Repo Rate and fund circulation in the economy. However, the rates of interest are also influenced by the policy adopted by financial institutions. This is why the interest rates of several public banks differ from each other.
- Home Loan Pre-Approved Offer Means the Loan is Sanctioned
You must have received emails from banks about pre-qualified housing loan offers. But, a pre-approved offer does not mean that your loan is approved already. It only indicates that you are eligible for a certain loan amount. But that can be passed only upon assessment and evaluation of the required documents, current credit score and history, and other factors.
- Prepaying Home Loans is a Good Choice
We get it that you are in a hurry to get rid of debt and may want to prepay home loan as soon as possible. But, this may not always be a wise decision. For instance, if you receive some funds as profit from a business or bonus, then you should calculate the interest saved on the housing loan vs. interest earned by making investments in other places to arrive at a decision.
Also, if you want to continue earn home loan tax benefits, then you may want to repay the loan as per the selected tenure. If the amount you earn from elsewhere is earning you higher profits than prepaying the loan, then you must choose the former option.
- Interest Rate is Constant through the Loan Tenure
Even if you take the loan on a fixed rate, this rate will not remain stable throughout the loan tenure. Of course the rate will be constant for a specific tenure, after which it will turn to floating or variable rate of interest. For instance, HDFC home loan is fixed for the initial 2 to 3 years, after which it fluctuates as per the market conditions and the rate policy implemented by the bank and the RBI.
- Refinancing Home Loan Increases Costs
You can transfer your home loan to another bank or NBFC if you are choosing a lower EMI, interest rate, or other benefits. RBI has abolished several aspects such as prepayment penalty, exit fee, foreclosure charges after a period, so you can take benefit of these changes, and refinance a housing loan without a worry.
- Nationalized Banks Always Offer Better Home Loan Offers
The chances of subsidizing rates and charges are higher in case of public banks, but it does not guarantee that the home loan offer from such banks will be better than that from private banks or NBFCs. In fact, there are many cooperative institutions, NBFCs, and banks that offer loans at lower rates than public banks, and have less stringent eligibility criteria for customers.
- Choosing Current Bank is Wise
Many banks offer discounts and better offers to loyal and existing customers. But these offers necessarily may not be the best in the market. You must always compare home loan schemes across different banks and NBFCs to understand if your current bank is providing a better deal or not. Maybe another bank is prepared to lend a higher loan amount at a flexible tenure than the current bank? So, never choose a loan scheme blindly, but compare those across different providers.
A home loan is a big expense, amounting to several lakhs. It is also a long-term loan up to 20 to 30 years. So when looking for a housing loan, you must understand the loan scheme in detail and never believe vague statements without verifying the facts. Trusting myths can make you take wrong decisions and cause financial burden. Thus, it is crucial to bust the common misbelieves about housing loans.
Sonal Mathur is a freelance financial advisor and consultant with 6+ years experience, currently working for loanbaba.com which a one-stop marketplace for personal loan, business loan, home loan, and small cash loan. She is also passionate about sharing her knowledge through blog posts.