Common Home Loan Misconceptions and Myths
With the rising personal incomes, people working in MNC outside their hometown and living in metros are looking for home loan to buy homes so that they can save out of rentals which they have to pay every month. Normally a 2 BHK flat in metros like Mumbai cost you around Rs 15,000 per month for rentals and might be around Rs 12,000 in Gurgaon on the lower side.
That opens up the gates for individuals to think about buying home and funding it by home loan in India. Many people in India doesn’t know the impact of managing home loan is on the household finances looking at the increased living expenses of most of the families.
In such a situation, it would be much better to understand the various aspects of home loan and knowing how to manage it in a way which helps you to :-
- Manage mutual fund SIP after paying home loan EMI
- Spend on household chores without any problem
- Maintain sufficient contingency fund
- Manage short term goals like buying car and short holiday tours
Let’s study some of these home loan misconceptions which Indian investors have in their brain:
1. Choose Short Time Period to close Home Loan Account Earliest
Like the stock market prices go up and down and you are never sure about your stock price, likewise your home loan interest rate keeps on fluctuating. This is precisely the reason why most investors try to choose the shortest possible time period for home loan in India to avoid fluctuations in the interest rates due to increase in CRR and Repo rates by RBI.
This is precisely the reason which these people face liquidity issues in their personal bank accounts and they are unable to save money side by side and pay off home loan before maturity without any home loan prepayment charges. When they invest outside (I mean apart from paying home loan EMI), they should expect returns of atleast 12-15% per annum which is normally more than 10.5-11% interest you are paying on home loan.
So conclusion over here is you should be able to save more and pay off your home loan debt early if you invest some money outside rather than increasing EMIs by reducing your tenure for home loan. Loans are usually only interest-only for a set period of time, after which you will either need to increase your repayments to start reducing the principal, or repay the loan in full.
2. Increase in Interest Rates directly means Increased EMIs
When the govt raises interest rates, the first thought which comes to any investor brain is that they have to pay inflated EMIs. But this is actually not the case with. As a general rule, with the rise in the interest rates, banks normally increase the tenure of the home loan and keeping EMI amount intact so that it doesn’t increase the chances of EMI default and thus increasing NPA level for banks.
But this decision also depends upon the age, current income of the borrower and his ability to pay inflated EMIs. In the interest rate cycle, the interest rates go up and then it comes down and EMI comes near to the same level after some years. You have to inform your bank in case you wish to increase your EMI, not your tenure
3. Lowest Rate Home Loan is the best deal
Lower interest rate means lower EMIs for the same home loan tenure. But that hold true only when you are eligible to get home loan from the financial institution where home loan interest rate is lower. In such a situation, the home loan borrower must study the other important factors like home loan initial processing fee, home loan processing time and the quality of service by its employees.
Generally private sector banks serve better because they have certain level of commitment towards their job.
4. Shifting Home Loan to another Bank require repaying from scratch
A lot of home loan investors have this misconception in their brain where they believe that they have to repay the loan from the scratch if they choose to switch one bank to another. There is one sheet called “home loan amortization schedule” which creates a break up of your principal and interest paid from your each EMI.
The new bank would seek your remaining principal amount which is yet to be paid and he would calculate EMI on that basis which should be equal (may be 1-2% different) if we take same remaining number of months which we had with our previous bank.
Also read Home Loan Repayment Schedule