9 Common Myths About Home Loans That You Need to Know

The decision to take a Home Loan is a decision that will have long-term implications for the way you live. Home Loans involve a hefty sum and are a long-term commitment. Borrowers, therefore, must avail of a Home Loan only after carefully understanding this financial product. Unfortunately, common Home Loan myths that are so widely prevalent stop potential loan borrowers from developing a true understanding of this financial tool that can help them fulfil their dream of becoming a homeowner. 

This article busts the most common Home Loan myths.  

Myth#1: Low-Interest Rate Home Loans Are the Best

The interest rate you get on a Home Loan determines how affordable the loan will be for you. Consequently, when you get a low interest Home Loan, repaying the loan becomes easier. 

This is true most of the time but not always. Sometimes, a lender may offer you a Home Loan at low-interest rates but may charge an enormous prepayment penalty every time you make a part pre-payment. Similarly, some lenders charge a very high legal valuation fee, which is high enough to exhaust the savings you would make by way of a low-interest rate. Thus, potential borrowers must never choose the right Home Loan for them based only on the interest rate offered. They must read the final loan agreement carefully for hidden charges before signing on the dotted line.  

Myth#2: Home Loans with High-Interest Rates are Unaffordable

This is another common myth -- most people assume that Home Loans that draw a high-interest rate are unaffordable. When banks and lenders offer a high-interest rate Home Loan deal to a customer, they, more often than not, give the borrower the flexibility to choose a longer repayment period to ensure affordability. High-interest rate Home Loans with a long tenor are quite affordable. However, borrowers must keep in mind that when the repayment period increases, the total interest outgo increases too.  

Myth#3: If You Make a Prepayment, You Must Pay a Hefty Prepayment Penalty

If you are a Home Loan borrower, you must know two things:  

1. As per RBI's mandate, individuals who have availed of a Home Loan on floating interest rates can prepay or foreclose their loan at any time they want without paying any additional charges.  
2. Individual borrowers who have availed of a Home Loan on fixed interest rates can prepay or foreclose their loan at no additional cost if they use personal savings for prepayments and foreclosure. 

Even if you do not fall under any of the two categories mentioned above, know that most lenders will allow you to prepay up to 25% of the total Home Loan amount without paying any penalty.

Also Read: Five Important Factors to Keep in Mind When Prepaying Your Home Loan 

Myth#4: Your CIBIL Score Is the Only Thing Your Lender Will Check While Deciding on Your Home Loan Application

The CIBIL score is a three-digit number ranging between 300 and 900 that indicates an individual's creditworthiness and repayment capacity. The higher your CIBIL score, the better your chances of loan approval.  

Though the CIBIL score is one of the most important factors that determine an individual's home loan eligibility, it is not the only factor.  . Lenders also consider other factors, such as the applicant's employment status and income stability, age, and location of the property pledged as security, etc., while deciding on a Home Loan application. Therefore, sometimes borrowers get approved for a Home Loan even when their CIBIL score does not meet the lender's eligibility requirement. 

Myth#5: People Should Take Home Loans to Avail of Home Loan Tax Benefits

This is another common Home Loan myth. People are often heard saying that they have taken a Home Loan to save on tax.  

A Home Loan is a long-term commitment and a huge responsibility. So, if you are taking a Home Loan only to avail yourself of tax benefits, you are making a mistake. The Home Loan isn't the only way to save taxes -- if you are availing of a Home Loan only to save taxes, it is recommended that you take other tax-saving measures. 

Myth#6: Home Loans Are an Expensive Affair

This is one of the most common Home Loan myths and the most bizarre one given Home Loans are the cheapest of all loans. 

The government of India has always supported homeownership and one of the ways it does so is by keeping Home Loan interest rates low. Currently, Home Loan interest rates vary from 8.45%* p.a. to 15.00%* p.a. Compare this to a personal loan that draws interest rates in the range of 12% to 20% and you will understand how affordable Home Loans are.  

Myth#7: Home Loan Interest Rates are Governed by the RBI

Many people think that the Reserve Bank of India directly governs Home Loan interest rates. This perception persists because whenever the RBI hikes the Repo Rate, Home Loans become expensive and vice versa.   

While the RBI does determine key rates, the decision to decide the final Home Loan interest rates that can be offered to customers lies with the lenders themselves. Therefore, different lenders charge different Home Loan interest rates.  

Myth#8: One Must Always Go for a Short Tenor

When you take a Home Loan, it is normal for you to want to become debt-free as soon as possible. Further, when you choose a short tenor, you also reduce your total interest outgo. Thus, choosing to go with the shortest tenor possible would seem like the obvious right choice.   

However, sometimes, in their attempt to keep their tenor short, borrowers make their EMIs too high and therefore, unaffordable. This eventually leads to payment defaults. This is a scenario one must avoid at all costs as late and missed EMI payments not only draw a penalty but also reflect very badly on an individual's credit report, ruining their chances of availing of another loan in the future. 

Myth#9: Fixed Rate Home Loans are Better Than Floating Interest Rate Home Loans

Borrowers are often advised to go with fixed-rate Home Loans since, in the case of these Home Loans, the EMIs remain the same throughout the tenor of the loan, irrespective of the external market conditions. However, in truth, floating interest rates are a better option than fixed interest rates, primarily for two different reasons. First, floating-interest rate Home Loans are cheaper than fixed-interest Home Loans. Second, floating-interest rate Home Loans allow borrowers to save considerably on their Home Loan EMIs whenever the home Loan interest rates go down.

Home Loans are an easy and convenient way to build an asset. If you are planning to take a Home Loan, do not let the above-mentioned common Home Loan myths dissuade you. Read as much as you can and make an informed decision. 

Additional Read: Fixed VS Floating Interest Rates

*Terms and conditions apply.