Problems with Home loan

With home loans come great advantages and problems altogether. RBI has recently taken a lot of measures to protect customers with home loans and get them better deals also. But, here are a few areas where RBI can look into as a part of its consumer protection initiative:

Banks have an interest in the property mortgaged with them and they need to ensure that it is protected against any eventuality. At the same time banks also gain by selling insurance policies.  But what need to be insured are the cost of construction and not the cost of land. Because, It is therefore not clear whether the bank’s insurance policy will pay a claim when the housing society is also making a claim for the property damage.

Most home loan borrowers focus on the interest rate at the time of availing home loans. But floating rates are dynamic and vary from time to time. The borrower is not aware of this because while rates vary, the equated monthly installment or EMI does not. Banks hardly change the tenure of the loan.   Very rarely does a bank communicate to the borrower about changes in interest rates.

In Maharashtra the government had made it compulsory for all mortgage interests to be registered. This was aimed at preventing fraudulent sale of the property even if the loan is outstanding.  Although the law actually protects the bank’s interest lenders. Rather than to facilitate smooth registration by the institution, borrowers are forced to approach agents and spend a few thousands to complete this process.

Lenders often poach from home loan borrowers of other institutions through Home Loan Emi Calculator. But when it comes to their existing customer they do not offer them the benefit of new rates.  If there is a special scheme running in the bank, existing borrowers are not informed of it. Also banks charge customers a processing fee even when their loan is refinanced within by their own bank but under a different scheme.

Some banks have resorted to complicating the pricing of home loans introducing interest free years in middle of the tenure of the loan. Innovation in financial products is good only as long as they do not obscure pricing. Borrowers need to have the opportunity to compare the cost of one home loan against another.  One way to make the pricing transparent is to disclose the cost in the form of annualized yield to the lender based on prevailing rates.

[Source: http://loanwalle.com/blog/problems-with-home-loan/]