Debunking the Top 3 Home Loan Myths

According to a recent research conducted by Karvy Private Wealth, Indians largely invest in Real Estate and Gold. Putting all their lifetime savings into a plot or a house has always been considered to be the best investment option in India. Because of this notion, people often equate one’s status to the number of houses they own. But modern Indians have realized that investing a huge amount of money in a single huge asset isn’t necessarily a good option and are instead switching to Home Loans. It’s no wonder that the Home Loan segment makes up the largest proportion of all credit products in India!

With almost all major banks in India offering unique Home Loan products with competitive interest rates, choosing one perfect loan scheme can be quite a daunting task. Without a proper understanding of the Home Loan clauses, you could easily fall victim to some common misconceptions. Here are the top 3 Home Loan myths floating around.

Myth 1 – Increase in Interest Rate Translates to Inflated EMIs

Simple math, right? NO! Whenever a bank revises the base rate, the knee-jerk reaction of many borrowers is the anger that the increase in interest rate will cause chaos in their monthly budget.

Ah, but this might just be the biggest Home Loan myth ever. In line with the interest rate changes, the tenure could fluctuate over an interest rate cycle. In fact, banks generally extend the tenure to keep the EMI amount unchanged in case there is an interest rate change. By default, it is the tenure that is extended to keep the installment amount the same. Try using an online Home Loan Emi Calculator to get an idea of how your repayment will progress over the tenure.

Pro Tip – If you do not want to prolong the tenure, you just have to inform your bank that you are okay with servicing a higher EMI. Keep in mind that you are actually hurting your finances by extending the loan tenure as you will end up paying a lot more in interest. Try to prepay your loan in parts or refinance the loan to reduce your tenure.

Myth 2 – The Deal with the Best Interest Rate must be the Best Deal

While the cheapest detergent powder might be a good detergent powder, you cannot apply the same logic to Home Loans. Dig deeper to ensure that your lender is indeed giving you the best deal – check out the valuation charges, prepayment penalty & processing fee in addition to the interest rate. At first glance, the deal might look tempting, but it might not be flexible or might come with higher fees.

Pro Tip – Think about the Home Loan features that will best suit your finances and objectives before you zero in on a lender. Compare Home Loan options before you apply for one!

Myth 3 – Borrowers must always opt for a Shorter Tenure and try to close the Home Loan Account as soon as possible

Most borrowers opt for the shortest loan tenure possible for Home Loans to avoid repercussions from an increase in Repo rates by the RBI. But think about it; shorter tenures also mean higher EMIs and you risk facing liquidity issues if you don’t manage your money carefully. Instead, try to save some money side by side and invest in options that give returns of at least 12% to 15% which are normally greater than the 10.5% to 11.5% interest that you pay on your Home Loan.

Pro Tip – Diversify your investment portfolio! Pay off your Home Loan debt early by investing some money in other products rather than increasing your EMI by reducing the Home Loan tenure.

[Source: https://blog.bankbazaar.com/debunking-the-top-3-home-loan-myths/]