Forbes India 15th Anniversary Special

6 top home loan myths demystified

Published: May 28, 2018 02:43:04 PM IST

6 top home loan myths demystified
The internet is a vast, cluttered space with plenty of information floating around. While it offers some critical pieces of knowledge on a regular basis, there are also other times when you are fed with misinformation. Home loans are one of those things that have truck loads of wrong information — myths in other terms—circling around the web. In this article, we will list out some of these and explain why and how these assertions are held in the wrong regard.

1. Low interest rate loans are the best bargain
This is one of the biggest myths relating to home loans, not simply because it isn’t true, but also because a statement like this doesn’t tell you the full story. Banks and other lenders are, first and foremost, for-profit organisations, and their marketing strategy circles around enticing more customers and generating large revenues. They attempt to do this by offers various interesting offers like low interest rates among others to catch people’s attention. But, the truth is, in such cases lenders tend to hide plenty of things in their terms and conditions to make up for the money they are supposedly losing out. For instance, they will add some extra charges like legal valuation fee, processing fee, and prepayment penalty among others. When you pay all of the aforementioned fees, the lenders most likely will have made up most of their money they’d otherwise lose through their low interest offering.

What we suggest: Keep this in mind and never simply go for a home loan with low interest rates. Carefully analyse the offer at hand and check if there are any additional charges you are expected to cover.

2. The property’s authenticity checks out if you get a home loan

This isn’t necessarily true - not always. Lenders usually look at a number of things and will expect the loan applicant to have done their due diligence before applying for a loan. The responsibility to determine a title deed’s authenticity rests entirely on the borrower as lenders’ primary objective is to offer you the loan you are looking for. If, say, you have your loan approved and turns out the title deed of the property is a farce, you will still be required to repay the loan you have borrowed.

What we suggest: Always make sure to verify the authenticity of the property you are buying. Reach out to your zonal sub-registrar office and get an Encumbrance Certificate (EC) for your prospective home. This document lists out any possible obligations - financial, legal, or both - on a property in question. You can also enlist some legal help to get this sorted out for you.

3. Fixed rate home loan is much better than floating rate home loan

This is a widely held belief, one that isn’t without basis. To begin with, both fixed and floating interest rate home loans have their own advantages and disadvantages. While a fixed interest rate loan offers you an exact EMI figure to pay every month, it doesn’t take into account any future decline in interest rates. On the other hand, a floating interest rate loan considers changes in market rates, and applies these changes to the interest a borrower will pay.

What we suggest: It’s best that you compare rates from different lenders before choosing the type of interest rate scheme. There are lenders these days that are offering loans at interest rates as low as 8.35%, so think before you put pen to paper on any loan deal.

4. Refinancing a home loan isn’t always the best option

In this case, the opposite is actually true. These days, just about every lender has begun offering a home loan balance transfer option, wherein a home loan holder can switch their loan from one lender to the other. Nobody can fault your decision if you decide to opt for a lender who is offering you a significantly lower rate than your current one.

What we suggest: While it might be a good idea to switch loans if you aren’t getting the best end of the deal, you shouldn’t be hasty with your decision. Before going ahead with the switch, have a discussion with your current lender. Chances are they might even revise the terms of your loan and offer you a much lower interest rate that is agreeable to you.

5. You cannot buy a house if you don’t have the 20% down payment ready
This might have worked a few years ago, but the banking industry of the present is far more flexible to allow such things deter their business. Though it is essential to have the down payment ready when applying for a home loan, it isn’t the end of the world if you don’t have the capital ready. As long as you’re okay with it, lenders will use a different property of yours as collateral to raise the required funds. So, when you’re repaying your loan, you will also be making payments to clear off the other debt as well.

What we suggest: You can use any major property you have in your name. This could be a plot or another house of your own to get the required funds ready. If your finances allow you, you can also choose to avail a personal loan for this purpose.

6. RBI reduces home loan interest rates

First things first, things need to be clarified. The Reserve Bank of India is in no way responsible for what happens with a home loan - not directly anyway. The one major way RBI influences home loans would be through the repo rate changes it makes from time to time. Repo rate, in simpler terms, is the rate at which the RBI lends money to commercial banks, and when the former introduces a rate cut, banks and financial institutions are required to make necessary changes to pass the same benefit onto their customers. To be clear, RBI’s main objective is to put policies in place and also enforce them to an extent. But it has little say in the interest rates you are likely to be offered.

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