- Planning to buy a house with a home loan? Stay away from these mistakes!
- These include taking a new loan just before a home loan, going for a fixed interest rate, etc. - Read this post for more details
A house remains one of the big-ticket purchases as real estate costs are quite high. A very few have the luxury of buying it without a home loan. The rest will need to take a loan to fulfill this BIG dream. That said, one needs to pay something from their end too! Yes, a home loan is financed to the extent of 75-90% of the property only with the rest being your responsibility.
Before taking a home loan, you follow Dos like comparing interest rates, accumulating the required down payment amount, etc. But somehow, we don’t focus on the Don’ts, which is as important as Dos. Being unaware of these could lead to more payments or even a home loan rejection. Either of these could be painful for you! So to help you avoid such hassles, we have brought here some Don’ts. Read on to know the same and act accordingly.
So What Do You Need to Avoid Before Taking a Home Loan?
You should avoid taking a new loan not long before a home loan, which can run for as long as 30 years. Apart from that, don’t choose a fixed interest rate over a floating rate while also staying away from impulsive shopping with a credit card. We’ll tell you below the reasons to avoid these temptations.
Taking a New Loan Just Before a Home Loan
As home loan EMIs can be a considerable amount to pay, taking a new loan not long before you apply for a home loan can reduce your eligibility for the latter. Either the lender will reject your home loan application or increase the tenure to help accommodate the required EMI. But with an increased tenure, the interest obligation will rise significantly. So, save in a way that you don’t have to take loans often to meet your personal needs.
Impulsive Credit Card Shopping
Having a credit card is not uncommon in today’s times where the focus is so much on cashless transactions. If you shop according to your income, you can pay the credit card bill in full and avoid interest and taxes. Otherwise, you may fall into the trap of a high interest rate of 30-45% per annum by being forced to pay the due partially. The tax will apply to the interest portion of the bill. With subsequent shopping, the due will pile on further.
So, you won’t feel good having to pay a reasonably large home loan EMI as well as an inflated credit card bill. Chances of default in any of the two could only increase with this sort of shopping. So, don’t go for impulsive credit card shopping, instead check your payment capacity and shop accordingly.
A Poor Credit Profile
CIBIL and other credit bureaus assign credit scores to individuals based on their repayment track. The score comes in the range of 300 to 900 in India. Most lenders don’t offer unsecured loans such as personal loans to individuals with a bad credit score. The same is not the case with a home loan.
But a bad score will raise your home loan interest rate, resulting in elevated costs for you to bear. The EMI may rise slightly, but the overall interest outgo could rise beyond your imagination! An example below will help you understand the point better.
For example, you and your friend apply for a home loan of INR 50 lakh for 20 years. While you get an interest rate of 8.50% as your credit score was below 600, your friend gets the same at 7.75% as his score was more than 750. You could see the difference in interest rate is less than 1%. But then, in a home loan, even such a difference could bring a massive difference eventually.
While your friend will pay INR 41,047 as EMI, his overall interest outgo will amount to INR 48,51,383. In contrast, you will pay an EMI of INR 43,391, which will lead to interest payments worth INR 54,13,879. The difference of the EMI is just INR 2,344 (43,391-41,047). But you will pay INR 5,62,496 (54,13,879-48,51,383) more than your friend towards interest.
So, whatever loan or credit card you have now, pay it on time and have a good score. A lower home loan interest rate later will raise a smile on your face!
Don’t Plan a Fixed Home Loan
Many go for fixed home loan interest rates instead of floating under the impression that the rate won’t change in the former. There’s nothing wrong in that impression! But analyzing both the rate systems and their functioning is equally important. Some don’t do that and end up paying way more. The rate might remain the same throughout in a fixed rate, but it will be higher than the floating interest rate by at least 2-4%.
You have already seen a massive difference in interest obligations with the difference in the interest rate being less than 1%. So, imagine how much you will pay by choosing a fixed rate regime. Even as floating interest rates will keep changing with time, the cost will still be less compared to a fixed rate system. What’s more, the fluctuation in rates does not change the EMI unless you do a home loan balance transfer or prepayment later.
So, we won’t recommend a fixed rate home loan given the massive cost involved in it. Go for a floating rate, but compare the offers of different lenders and choose the lowest one. The table below will help you do so. Take a look!
|Lenders||Interest Rates (In Per Annum)|
|State Bank of India (SBI)||8.85% - 9.75%|
|HDFC Limited||8.50% - 9.60%|
|ICICI Bank||9.00% - 10.05%|
|LIC Housing Finance (LIC HFL)||8.65% - 10.25%|
|PNB Housing Finance (PNBHFL)||8.50% - 10.35%|
|Bank of Baroda||8.50% - 10.60%|
|Axis Bank||8.75% - 9.15%|
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