- Having myths about a home loan can either increase your cost or make you rue for the missed opportunity
- We have listed out some home loan myths that you should avoid having - Let’s read and stay clear!
Seeking advice from someone who doesn’t know much about financial products like a home loan can lead you to develop myths only to harm you in the end. Having myths can either increase your home loan burden or make you lose out on opportunities. Seeing such shortcomings, one should stay away from myths and take a rational decision on a home loan. But how can you stay away from home loan myths? Well, you can take the advice here i.e. Wishfin, a premier online financial marketplace that offers unbiased solutions across the financial spectrum, and achieve the same. Let’s begin!
So What are Those Home Loan Myths That Most Borrowers Have Developed?
Borrowers these days have developed home loan myths regarding the functionality of interest rate, income tax exemptions, etc. Let’s check out all such myths in detail.
Fixed Rate Home Loan is Good
If you have developed this home loan myth, it could hurt you both in the short and long run. Home loans when accepted on a fixed interest rate do ensure the same rate of interest throughout the loan tenure, which can span upto 30 years. You might create an impression that a fixed rate of interest will lower the cost burden for you. But when you hear here that the interest rate will be around 3-4% more than a floating rate, which is another type of home loan interest rate, you will realize how costly a fixed rate regime can be for you. Both the Equated Monthly Installment (EMI) and interest outgo will be higher at a fixed rate.
A floating rate will have a different rate of interest according to different market conditions at different points of time. Despite rate fluctuations, a floating rate home loan can lower the cost substantially over the long term.
If we take the last 5 year floating home loan rates into consideration, they have largely remained under 10%. Thanks to banks using the repo rate as a benchmark to price floating rate home loans, the interest rate transmission has aligned with the market rate, much unlike other benchmarks such as the Marginal Cost of Lending Rate (MCLR) and base rate that have struggled to stay at par with the market rates. The floating rate home loan has come even below 7% at some banks. The average floating home loan rate now stands at 7%-8% per annum. Whereas, the fixed rate home loan can be around 10%-12%. Let’s check out the cost difference between a fixed rate and floating rate home loan considering an example below.
Example – Pritam Bansal and Ravi Mehta plan to borrow a home loan of INR 50 lakh each for 20 years. While Pritam is conservative, Ravi is rational in his approach. So, Pritam applies for a fixed rate of 11% and Ravi goes for a floating rate of 7.50% per annum. How will the repayment scenario pan out for these two over 20 years?
|Loan Amount||INR 50,00,000||INR 50,00,000|
|EMI @11%||INR 51,609||-|
|Interest Outgo @11%||INR 73,86,261||-|
|EMI @7.50%||-||INR 40,280|
|Interest Outgo @7.50%||-||INR 46,67,118|
The above table proves our point made earlier that the EMI and interest outgo will be higher in a home loan. Although the repayment estimate shown for Ravi who wants a floating rate home loan will not remain the same, it will still be much lower than that for Pritam.
In case you are servicing a fixed rate home loan, get that converted into a floating rate ASAP to reduce the outgo. There will be a fee you need to pay for the conversion. Check out the table below to know the same.
|State Bank of India (SBI)||INR 5,000|
|HDFC Limited||As Applicable|
|ICICI Bank||1.75% of the principal outstanding|
|LIC Housing Finance (LIC HFL)||INR 10,000|
|Punjab National Bank (PNB)||As Applicable|
|PNB Housing Finance (PNBHFL)||0.50% of the principal outstanding|
|Axis Bank||2% on the drawing power|
|Kotak Mahindra Bank||0.50% of the principal outstanding|
|YES BANK||0.50% of the principal outstanding|
Home Loan EMIs Change With Changes in a Floating Rate of Interest
This home loan myth results in many going for a fixed rate regime. The EMI will remain the same throughout the loan even in a floating rate home loan. What changes though in a floating rate is the amount of interest and the principal portion whenever the rate changes. The interest portion goes up and principal reduces when the interest rate rises and the other way round when the rate falls. The EMI can change only if you go for a balance transfer to another lender or make a part prepayment.
Tax Benefits Apply Only to Ready-to-Move Property and Not an Under-construction Unit
This home loan myth can also develop as most look to buy a ready-to-move property given that you can get its possession much faster compared to when buying an under-construction housing unit. Let’s be told that income tax benefits are also available for an under-construction property like it is for a ready-to-move property. You can claim tax benefits on the pre-construction interest in five equal installments after gaining possession.
Home Loan Prepayment Leads to Charges for Borrowers
Prepayment of most loans comes with charges but not home loans provided it is given on a floating rate basis. But some lenders can place a condition that a prepayment should happen from your own source and not via a home loan balance transfer. If it is via a balance transfer, they may deduct charges on prepayment. So, don’t carry this home loan myth. Instead, keep saving and accumulating it to prepay the loan in full or part when the opportunity arrives. A loan prepayment saves on your overall interest payments. Let’s consider an example to check out the savings on a home loan prepayment.
Example – You take a home loan of INR 50 lakh at 7.50% per annum for 20 years. In case you pay a part payment amount of INR 5 lakh after 5 years, how much will you save? You have got two options – either to go for the same EMI or look for a reduced EMI. What should you do? Let’s check out the repayment estimate in both these cases so that you can choose the right option.
|Loan Aspects||Repayment Estimate When Choosing to Pay the Same EMI After Part Payment||Repayment Estimate When Choosing to Pay a Lower EMI After Part Payment|
|Loan Amount||INR 50,00,000||INR 50,00,000|
|EMI Payable @7.50% Before Prepayment||INR 40,280||INR 40,280|
|Interest Payable @7.50% for 20 Years||INR 46,67,118||INR 46,67,118|
|Balance Loan Amount After 5 Years||INR 43,45,104||INR 43,45,104|
|Part Payment Amount After 5 Years||INR 5,00,000||INR 5,00,000|
|Balance Loan Amount After Part Payment||INR 38,45,104||INR 38,45,104|
|Interest Paid Before Part Payment||INR 17,61,885||INR 17,61,885|
|EMI After Part Payment||INR 40,280||INR 35,645|
|Interest Outgo After Part Payment||INR 20,28,667||INR 25,70,922|
|Interest Outgo Before Part Payment + Interest Outgo After Part Payment||INR 37,90,552||INR 43,32,807|
|Savings on Interest||INR 8,76,566 (46,67,118-37,90,552)||INR 3,34,111 (46,67,118-43,32,807)|
When you go with the same EMI of INR 40,280 after part payment, the remaining tenure will reduce to 146 months i.e. 12 years and 4 months instead of 15 years, which would be the case when you wish to go with a reduced EMI. The shorter tenure of 146 months will result in overall savings of INR 8,76,566, much more than INR 3,34,811 when you go with a 15-year tenure after making the part payment.
So, if you have funds for prepayment but are not doing because you have this home loan myth of charges for this transaction, you have now got a reason to do away with such thoughts.