Everyone aspires to buy their “Dream Home,” but it takes perseverance for this dream to come true. However, thanks to home loans, it is now a lot simpler than ever to fulfill this desire. With a home loan, one can also profit from a number of tax advantages and use it as leverage to buy a residential property.
With the aid of housing finance, you can easily become a property owner. However, there are several misconceptions about home loans in India. Anyone looking to take out a home loan to buy a property should be well-informed on a number of different problems before going into a bank with inflated expectations and running the risk of having their house loan application denied.
What is a home loan?
A home loan is a quantity of money obtained from a lender to buy a piece of property such as a house or a plot of land, which is held as security until the loan is repaid. Typically, the lender will pay up to 90% of the cost of purchasing a home. The person planning to purchase the home must also make a down payment on the balance.
Myths surrounding home loans
Bank will provide a 100% loan
No bank in India is permitted to loan more than 90% of the value of a property under the regulations set down for the banking industry. The maximum amount of money a bank will loan you to cover the value of the property is 90%. You must abide by a number of rules and regulations in order to do it.
The bank offering the lowest interest rate is the best
Given the importance of finances in home purchases, a novice borrower might choose the bank with the lowest current home loan interest rate. Unfortunately, there are a number of additional costs and constantly changing interest rates on house loans. You should consider the bank’s past record to see how soon it offered rate reduction advantages rather than letting the current home loan interest rate affect your choice.
You will get a home loan if you earn well
This is only accurate if you can demonstrate that you have some upfront cash saved. Additionally, banks are giving your credit score more weight when approving requests for home loans. Even if you have a fantastic wage package, your loan application will be rejected if your credit score is inadequate.
Co-borrowing is always good
Banks constantly push co-applicants for home loans. They claim that it improves your ability to borrow money, which is an eminently logical reason. What they fail to disclose is that they are essentially looking for a backup borrower in case the original application has a setback that makes it impossible for them to repay the loan. Co-borrowing may be advantageous, but you should only decide to use it after carefully reviewing this agreement.
You should borrow as much as you can
Even while there are many options for house loans, this does not mean that borrowers should take on as much debt as they can. Every rupee you borrow must be paid back over a long period of time, with interest. The loan amount for the residence should preferably be as small as possible.
You cannot negotiate on rates
Just like with anything that is on sale, there is always an opportunity for negotiation when it comes to home loans. Depending on your communication and persuasion skills, you might be able to persuade the bank to offer you a respectable home loan deal.
All lenders are more or less the same
Despite the fact that they are all in the loan business, banks, home finance companies (HFCs), and non-banking finance organizations are not all the same (NBFCs). In India, banks are directly supervised by the RBI. HFCs and NBFCs were just lately included in the supreme bank’s jurisdiction. Banks, HFCs, and NBFCs all function differently due to the fundamental variances in their architectural designs. Be sure you understand the difference before selecting your lender.
It is best to opt for loans with lower interest rates
Interest rates are only one aspect that affects how much you must spend to repay your loan. Even worse, a lender can lower the interest rate while increasing the processing fees, which would make paying back the loan much more expensive. When choosing a house loan, it is crucial to consider both the interest rate and other fees and charges.
Fixed interest rates are better than floating interest rates
While it’s a popular misconception that fixed interest rates are preferable to fluctuating interest rates for a house loan, this is inaccurate for a number of reasons. The floating interest rate is typically 1.5% to 2% cheaper than the fixed interest rates, despite the fact that market movements can cause it to change too frequently. Additionally, market volatility could not endure for very long, and if you choose a variable interest rate, you will ultimately pay less over the long term.
You have to pay penalties for foreclosure and prepayment
Another myth about house loans is that if a borrower wants to foreclose or prepay their debt, banks and other financial companies that supply loans also impose severe penalties. According to RBI regulations, which indicate that no fees can be applied to foreclosure or prepayment for housing loans with fluctuating interest rates, this is false. But on house loans with fixed interest rates, which can again vary between institutions, institutions may decide to impose these fees. This is why it’s crucial to comprehend the many fees connected to your loan rather than concentrating just on the interest rate.
It is better to apply directly for a home loan
The idea that it is best to apply for a house loan directly with a bank or other financial organization is a widespread one. This is a fallacy, though, as the lender will speak with credit bureaus each time you submit an application to learn more about your credit standing or score. Multiple applications will have a negative effect on your credit score and ultimately make it more difficult for you to obtain a loan that is adequately suited to your needs. Since any inquiry made through a FinTech portal is regarded as a “soft inquiry” and won’t lower your credit score, doing so is recommended.