Dispelling Common Misconceptions About Home Loans

August 22, 2023
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Housing loans are quite a common part of the real estate world, and they make it immensely easier for one to be able to buy their dream home relatively earlier in their life. However, there are quite a few common misconceptions revolving around home loans, especially in India. These can lead to costly consequences with regards to the purchase of a house, no matter where you plan on buying one. Whether you are looking at 3 BHK flats in Mumbai or any other city, it is vital that you do not make any of these mix-ups. Thankfully, we at L&T Realty have put together a few of the most common ones.

Common Misapprehensions About Housing Loans

Loan Approvals Are Guaranteed if You Have a Good Credit Score.
Many people are under the impression that they are sure to get their loan applications approved as long as they have a good score. However, a good credit score, while important, is still not all one needs in order to get a home loan. There are a number of other factors that play a part in the consequent approval or rejection of a loan application. These include factors such as applicant’s age, employment status, stability of their income, as well as whether the applicant has any other existing payments to be made on a monthly basis. If you have a good credit score but happen to be lacking in these other aspects, then there is a good chance that your application for a home loan gets rejected.

Shorter Loan Tenures Are Better.
It is a fairly common misconception among many loan applicants that loans which have a shorter period of time to repay the loan are the better ones to opt for. However, it is often overlooked that shorter repayment tenures will mean that the borrower will be required to pay the monthly installments in larger amounts. Therefore, if you simply choose a loan with a shorter period, you will have to be sure that you are able to pay the larger sums on a monthly basis.
Another mistake people make is assuming that the terms of a loan are final and non-negotiable. However, if the terms of a loan are not suitable for your situation, you are still free to try and negotiate with the lender and get a more favorable agreement.

The Lower the Interest Rate, the Better.
Many people wrongly believe that lower interest rates mean that a certain home loan option is automatically the best one. However, opting for such a loan may prove to be a costly mistake, and the total you end up paying can be higher than what was needed. This can easily be the case if the loan has a lower interest rate but also includes various charges such as prepayment penalties, processing fees, legal valuation charges, and much more. This is why paying attention to subtle details, as opposed to immediately jumping at the lowest price, can end up saving you substantial amounts of money. Whether you are looking at 4 BHK apartments in Bangalore or any other area, these details will all be a critical factor in your choice of loan.

You Will Surely Be Charged a Penalty for Prepayment.
You will not always be charged a fee for the prepayment of a loan, and such a charge will typically be imposed on you depending on a variety of factors. In most cases, a prepayment fee will be charged during the initial three to five years of the loan being taken. This charge will be gradually lowered over the course of the loan tenure. Another factor to take into account is whether the loan comes with a floating interest rate as opposed to fixed rates. If it does then the borrower will not have to pay a prepayment or foreclosure fee. However, it is still very likely that the concerned financial institution charges you a prepayment penalty if the loan involves fixed interest rates. This is another reason why you should pay attention to the fine print when it comes to applying for a loan.

It’s Better to choose Fixed Interest Rates Instead of Floating Interest Rates.
In many cases, borrowers often believe that it is better to opt for loans with fixed interest rates as opposed to those with floating interest rates. The reality is, there is no sure winner between the two, and the ideal choice for you depends entirely on your situation. If you do not have much knowledge about the potential trajectory of interest rates or you think that the interest rate is about to experience a drop, then it is advised to choose loans with floating interest rates. As a matter of fact, they are also the better option if you are looking to make savings in the short-term, as these rates may often be slightly lower than fixed interest rates. This means that if your loan tenure is less than 5 years, then opting for floating interest loans may be smarter, as you will most probably pay low interest rates for the majority of this tenure. This is because there will be a smaller window of time for interest rates to start rising.
If you are fine with paying the EMI that has been proposed in the loan, then you can opt for fixed interest loans. You can also do so if you think that interest rates are about to start rising. This would also be a great decision if the interest rates are currently experiencing a drop, and you can take advantage of such a situation.

Home Loan Interest Rates are Controlled by RBI.
It is a very common misconception that the interest rates that come with home loans are governed by the Reserve Bank of India. This is completely false as the nature of such interest rates will be decided by the banks or financial institutions that give out the loans, in most cases. However, the RBI does set a certain benchmark when it comes to interest rates, based on which the various lenders can add on the amount that they deem suitable. This benchmark rate set by the RBI is also often referred to as the ‘repo rate’. The final interest rate is decided by the lenders, and this will be decided based on a range of factors.

A home loan helps you bridge the gap from your home being a distant dream to a reality. But considering the intricate details and fine print that is involved when it comes to applying for and taking out a loan, it is certainly possible for one to make simple mistakes. This is why attention to detail is paramount, and it’s also why it might be wise for you to take the advice of a professional with experience when it comes to real estate and home loans. Whether you’re looking to invest in 2 BHK flats in Nerul or any other area, taking all the relevant details into account is going to be the main deciding factor with regards to the ideal loan option for you.

Disclaimer: Stock image used for representational purpose only.