Home loans are commonly availed by home buyers today. Still there are hosts of misconceptions about this popular loan variant. The reason around the myths is relying on the incomplete and half-baked information received from the people around. Following is the list of common myths and misconceptions around home loans.
The borrowers opting for floating rate of interest are under the impression that an upward revision on the repo rate will automatically impact the interest being charged on their loan. Repo rate is the interest rate at which the Reserve Bank of India lends to the commercial banks. But the change in the repo rate may not significantly change the average cost of funds for the bank. Hence, the borrowers need to understand clearly that in the event of an upward revision of the repo rate their loan rate may or may not get revised.
The bank does due diligence on the property. However, the responsibility of checking the validity and correctness of the documents equally lies with the borrowers as well. In case of any future dispute, the bank’s liability on loan will continue to stand and the borrower will not be able to shy away from the obligation of repayment.
A high credit score generally speaking is considered to be the gateway to approval on all loan applications. But that is again a myth. A high credit score will not ensure approval of a home loan. There are other factors like income, expense ratio, current obligations, industry that borrower works in, company employed with among other factors that influence the underwriting decision.
A lower interest rate is definitely not a guarantee to the borrower getting the best deal, while it is assumed to be. Interest though is one of the important considerations, it is not the only factor that influences the cost of funds. Charges like processing fee, legal charges etc also add up to the cost. Also, the service standard post loan booking should also be a consideration. Given the fact that home loans run over the long term, the chances of one needed service are quite high.
While the LTV commonly gets restricted to 80% of the property value, it may go up to 90% also in case the loan amount is restricted to Rs 30 lakh.
Prepayment of any loan is a good policy, but not the best. Especially when it comes to the complete closure of the home loan. First, given that the home loan rates are low, one should evaluate if investment of the amount being used to repay the loan will earn a higher return or not. In case the answer to this is yes, then it may be prudent to invest the funds. Second, the number of years a loan has been served shall also be a consideration in this decision. With each additional year of serving the loan, the share of principal component increases. So if one has taken a 15-year loan and have already served for 10 years, it may be a better idea to continue with the repayment since a major part of the interest has already been paid.
Like any other provider who would want to retain a good customer, the housing finance companies and banks may also extend some discount on the charges and interest to get your business. So one should not shy away from asking for it. Even a slight difference in the interest or charges can help in saving a large amount given that these are large-ticket loans.
Above are the major myths around the home loans. Since it is a long-term commitment, one needs to be aware of the important nuances of the product so as an informed decision is taken.
(By Arun Ramamurthy, Director & Founder, Credit Sudhaar)