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Mistakes to Avoid When Taking a Home Loan

Highlights

  • Looking for a home loan? Ensure you don’t fall prey to common mistakes
  • Mistakes include not comparing interest rates, choosing the wrong type of loan, etc.

A home loan allows us to step into our dream home, which, otherwise, can be an onerous task to accomplish. Property prices are still way off the reach of most people who don’t have the savings to buy a home without a loan. But your home loan decision should be free of flaws so that you don’t curse later on. With flaws, it is meant the excessive cost one can be subject to by choosing the wrong loan alternative. So, if you are planning a home loan, ensure you don’t commit mistakes that people often do. Below are some of the mistakes on a home loan you should avoid committing.

Choosing a Home Loan Without Doing Due Diligence on the Interest Rate

The interest rates of home loans are quite lower in comparison to personal loans. But still, there’s a need to compare and find the cheapest of the lot. The reason why there’s an emphasis on the interest rate is the fact that even a difference of 0.25%-0.50% can lead to the difference in the overall repayment to around INR 2 lakh. So, if you are choosing the home loan interest rate just thinking that the one offered to you is in line with the average market rate, you are committing a mistake. So, how should you go about choosing the interest rate? The best approach would be to go online and compare the home loan interest rates of different lenders and grab the best one.

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Going for the Longest Home Loan Tenure

Given the large-sized home loan amounts, a lot of us choose the longest tenure available. This decreases the Equated Monthly Installment (EMI), a portion of both principal and interest payable towards a home loan. But this can backfire you too. Yes, the longest tenure can result in massive interest repayments by the time the loan finishes. At the same time, choosing a very short tenure can lead to EMI defaults. So, choosing the tenure is one critical task that you should not ignore. Ideally, the home loan tenure you choose should keep EMIs affordable while also bringing down the outflow of interest.

Not Choosing the Right Type of Interest Rate

Even though home loans are offered predominantly on a floating interest rate, there are options of a fixed interest rate too. Plus, there’s also a system wherein both fixed and floating interest rates apply to the home loan amount. A lot of us choose the fixed interest rate just because the rate of interest remains throughout the loan tenure irrespective of the changes in the market rate that happens with the change in the inflation rate and general economic scenario. Along with a fixed rate, people also fall to the lure of teaser home loans where there will be a fixed interest rate for a few years before floating rates will imply. Both fixed rate and teaser home loan rates are offered a couple of percent more than floating rate loan rates. Click on teaser home loans to know why they are not good for borrowers.

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Historically, however, floating rate home loans have proven to be a cost-efficient option for borrowers. Yes, interest rates change over time, however, the net effect turns out positive for borrowers in the long run.

Going with a Set Loan to Value Ratio Even If You Have More Savings

Home loans are financed to a certain percentage of the property cost. Loans upto INR 30 lakh, above INR 30 lakh-75 lakh and above INR 75 lakh are financed at upto 90%, 80% and 75% of the property cost. In case you are looking for a loan to buy a property worth around INR 60 lakh, the maximum loan can be INR 50 lakh. This requires you to pay a down payment sum of INR 10 lakh. So, if you have savings worth INR 15-20 lakh, paying just INR 10 lakh in down payment won’t serve your purpose. Using increased savings for a down payment will reduce the loan amount and the subsequent interest on the same.

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  • Home Loan Interest Rates September 2020
    Axis Bank7.75% - 8.55%
    Bank of Baroda7.00% - 8.40%
    Citibank8.20%
    HDFC6.95% - 8.00%
    ICICI Bank6.95% - 8.05%
    Indiabulls Housing Finance Limited8.80% - 11.05%
    Kotak Bank7.20% - 9.30%
    LIC Housing6.90% - 7.90%
    Piramal Capital & Housing Finance9.00% - 9.10%
    PNB Housing Finance8.60% - 9.45%
    Reliance Home Finance8.75% - 14.00%
    State Bank of India/SBI6.95% - 7.60%
    Tata Capital9.20% - 9.35%