In my recent conversations and observations with women, have realized while most of them are aware of the need to have a better understanding of their individual finances; especially in regards to home loans investments due to the sheer magnitude of the investment. Just to give an inference just like we’d be healthier if we exercised regularly and consumed a proportionate diet but if told to’ eat healthy’ hasn’t led to any action as suggesting exercise regimen or recipes to get them started. Many have not given so much importance to investments as it wouldn’t be useful to urge women to get up and take control over their loans, without explaining the impact and its process.
This is one of the key reasons that I decided to pen down general misconceptions and queries that people generally have as far as their home loan investments are concerned. With the interest rates touching the roof, the EMIs have again become a cause of concern amongst the borrowers and their overall planning. The impact has been telling on many household’s finances, which are already under strain due to the rising living expenses. In such a scenario, it would be a relief for to understand the nuances of their home loan contract which have been created for their advantage. These are aspects which men (who tend to control other investments) tend to also at times oversee.
Without understanding the clauses, you could become a victim of some general misconceptions about loans and shut out ways to lighten the EM burden. Here are some ten myths which is given a miss or are unaware.
# 1 In Order to Close Loan Soon One You Should Take One with a Shortest Tenure
These days buying a home loan is like investing in stock market. You should take a bird’s eye view on your financial health and then take a call. With the fluctuating interest rates, the immediate reaction of naïve borrowers with liquidity is to apply for a loan for a short tenure. They generally do so; with a belief that it would protect them from the modalities of the market.
Unfortunately, this one of the biggest mistakes that people commit, they tend to take home loans with a short term perspective and then repent. By taking a loan for short term they increase the quantum of their EMIs. Thus reducing the liquidity in their accounts and the ability to make another major investment (or take another loan for that matter), this over commitment can also lead to long term repercussions like defaulting payment of EMI.
Rather than doing this an individual should take a loan for a longer period of time, this not only significantly reduces the burden on the borrower but also gives him the facility to pre pay the loan without any pre closure penalty. It is vital for people to know that one cannot increase the tenure of the loan period but at the same time one can reduce the same by pre paying the loan.
# 2 Hike in Interest Rate Means Inflated EMIs
The immediate reaction of borrowers to an upward treading bank base rate (just to throw more light base rates are the benchmark set by the RBI for the bank below which they cannot set their interest rates) – and the resulting rise in home loan rate – is that it would push up their EMIs, wreaking havoc on their monthly installments and subsequently in the monthly installments.
This is one of the biggest myths of all especially when the rates are hardening. In fact, most banks, subject to conditions, usually extend the tenure of the loan and keep the EMI amount unchanged. Over an interest rate cycle, the tenure could change in line with the shift in applicable interest rate. However the decision depends upon various factors such as the age of the borrower; property, income and so on.
By default it’s tenure that is extended and the EMI amount sees no impact. There if an individual does not wish to prolong his/her loan payment, he/she can inform the bank.
By default it’s the tenure that is extended and the EMI amount sees no impact. Therefore, if you do not wish to prolong your loan repayment, you need to inform the bank about your willingness to service a higher EMI.
# 3 Loans With Lowest Interest Rate is the Best Deal
A few years back a lot of bankers would have considered this as the most important factor while advising loans as there was considerable disparity in the interest offered by the banks. Today that is not the case the modalities of the market are such that banks are offering competitive and similar interest rates making it difficult for consumers to decide on the basis of this facet.
Moreover, low interest rates may mean lower EMIs, but it may not serve an individual’s purpose if the sanctioned loan amount does not meet his/her requirement. If your loan eligibility as per lender’s evaluation norms falls short, the low interest rate will be little consolation. Also one needs to ensure that the bank indeed is offering the best available deal.
The key in such situations is to understand what product type and features best suit your financial needs and objectives first and then figure out the cost rather than just the low interest rate being the sole decision making factor.
# 4 Fixed Rates are better Than Floating Rates
Home loan requirement for each person is as unique as his/her fingerprints; hence your friend’s home loan experience should not be used as a benchmark. The same theory applies to fixed and floating rate loan; the choice of the same completely depends on a person’s income, ability to pay and the age.
Floating Rates are depend on the modalities of the market and fluctuate on the basis of factors like repo rate, Reverse Repo Rate, Marginal Standing Facility (MSF), Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and a number of other factors (this is not the case with fixed rates). Understanding the complexities of these jargons and terminologies are important to be understood by the bank. When teaser rates (Initial few years the borrower would be charged a fixed rate of interest and after a point it the rate of interest would change basis the changes in the market) came into being the fixed rates were generally less than the floating rate, currently the scenario is upside down floating rates are relatively less than fixed rates. Hence there is no rule that can clearly define which out of the two is better.
In a nutshell person should take a call basis his financial health and comfort zone.
# 5 If a Person Shifts his Loan to Another Bank He will have to Start Repaying from Scratch
This is major misconception has led to individuals continuing in the same bank despite having an opportunity to avail the benefits of an enhanced product in a different bank. It is a wise for an individual to switch banks if he is getting a product that fits into his requirement. It is a misnomer that he will have to start repaying the loan from scratch.
The new bank will just have to prepare an amortization schedule (which is a breakup of principal and interest) which would be the case even when your current bank has any rate changes. While changing banks ones principal component would remain the same only the interest component would reduce which is a huge saving.
# 6 All Home Loan Closure Costs a Lot of Money, Difficult Paperwork and a Lot of Time
The onset of MNC’s and private players in the banking scenario in India has led to drastic changes in the way the industry functions. It has become extremely convenient to purchase loans and other banking products as they are consumer friendly. The need of the hour is to have complete and in-depth information for an informed decision.
The same goes for home loan closures against common perception it is a very easy process one just needs to be in touch for the right guidance. All the bank needs to know is the borrower’s repaying ability which is proved by income documents and an account of a person’s assets and liabilities. The process is even easier for a self employed person who just needs to share their past track record. As long as a person has not committed any default in the past s/he is eligible for the loans.
As for closing the loan prior to completion of tenure, according to guidelines issued by NHB and RBI one no longer needs to pay a pre closure penalty.
# 7 If One Sells a Property on which there is Outstanding, He will have to First Prepay His Loan and then Get an NOC from the Bank
This is one of the greatest misnomers that people have, the completion in the sector has led to a lot of banks creating products that suit the needs and requirements of the consumers. Vendor Takeover is a classic example of the same where the property to be sold is already under lien. Naturally, the idea for the seller is that he has to clear the mortgage in order to be able to transfer the ownership. While this is partially true, the seller can however bypass closing the loan himself and expedite the process with the help of the lender the buyer is borrowing from. In this case, the new lender of the buyer shall help release the mortgage created by the seller with the erstwhile lender up to the outstanding amount due.
# 8 If I don’t have at least 20% of the property cost, I cannot buy a home as no lender will give me a loan
The current competitive scenario in the banking sector has led to an innovation of customer friendly products by a number of banks. These products have been created keeping in mind a variety of situational hassles that a consumer can face, in a nutshell they safe guard their consumer’s interest. In case the borrower does not have the requisite 20% of the property cost he can still get a home loan wherein the borrower may choose to mortgage any of his other assets or take another loan to pay the amount s/he is unable to pay. However, in case of a under construction property one can opt for parallel funding wherein the down payment can be as less as 10-15% and the balance payments can be linked to the phase of construction. Here, the lender along with the borrower continues to pay up as per the construction progress and demand of the builder in the ratio of 80:20. Some banks also offer a fine spun product where a 10:80:10 payment method is also made possible. This translates into the buyer contributing only 10% of the cost and paying the remaining 10% during possession, thus reducing the challenge of paying 20% upfront.
#9 I don’t need to have my income documents for taking a home loan if I am mortgaging my high-cost property
The ability and the willingness to pay back the loan are two cornerstones on the basis of which banks give the borrower the loan. While the income documents and account of assets and liabilities give a fair idea of a borrower’s willingness. The individual’s past track record is checked for the willingness and capabilities for reduced delinquency to pay. In case of self employed individuals they are transferring the loan which gives them the past track record. Hence the value of the mortgaged property is not even considered as a pre requisite prior to assigning the loan. Thus irrespective of the value of the property it is integral for person to submit the required details for the bank to grant the loan.
# 10 Taking a Personal Loan for Your Self-Contribution in the Property Eases Finance Issues
As personal loans are easier to get as compared to home loans people tend to use it as a tool when it comes to contributing to a property. As they say shortcuts are not always best way to go and incase of personal finance they are surely not a very good idea. People forget that Personal Loans today are pegged at 14% interest and the tenure is less as compared to other loans. This means the quantum of EMIs would be high thus increasing the burden on an individual rather than easing it out.
There are other products offered by prominent banks in the country that can prove to be a savior in such a scenario. One can put another property at mortgage or get a loan against property at 11.5% with a long tenure. In case a person is already paying home loan then s/he can do a balance transfer in another bank which offers him a top up at home loan rate (i.e 10.5% for 20 lakhs)
The recent fluctuations in the market apart from creating havoc in the household expenses have created flux for people’s financial projections. In such a scenario I advise my clients to seek expert advice; prior to purchasing any financial product especially a home loan. The quantum of investment which in a home a loan is huge and default in the payment can have a long lasting impact on ones financial health, hence just as we plan and research for the best properties in town prior to purchasing our dream home; it is time that we also research for the right guidance and understanding towards home loan.
Sukanya Kumar, Founder and Director, Retail lending.com.