Common Home Loan Myths

1. The bank is not concerned with the Employment Status of the borrower

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.

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. The home loan agreement states that the borrower has to keep the bank informed about his employment status i.e. whether he has changed his job or lost his job or retirement etc.

2. Higher EMI is better than longer Tenure or vice versa

 This question always gives you a tough time. Ideally one should go for a higher EMI, at first it might cause a dent to the borrower’s pocket but it would benefit you in the longer term. This is because most home loan borrowers are in their 30’s when they apply for loans, and if the loan tenure is of about 30 years or more then the borrower will be paying off his loan even after his retirement, this obligation would then be difficult to fulfill when he will have no source of income.

3. Hike in interest rate means inflated EMIs

Do not freak out when you listen to something like this. Most banks, subject to conditions, usually extend the tenure of the loan and keep the EMI amount unchanged. This decision is taken by banks on various factors such as a borrower’s property, income and so on. It completely depends on t a borrower if he/she does not wish to prolong their loan repayment they can inform the bank about their willingness to service a higher EMI.

4. Fixed Rate of interest is better or Floating Rate of Interest

Fixed Rate of Interest: The interest rate charged on the loan remains fixed irrespective of the interest rate trends. The EMI on your loan amount will remain the same for the entire term. Floating Rate of Interest: The interest rate on your loan will vary according to the interest rate prevailing in the market. Whether the either is better or not for you entirely depends on the market scenario. If the interest rates are expected to fall then fixed rate of interest will not be good but at that time floating rate of interest would be favorable, as that would lower your EMI. On the other hand if the interest rates are rising then the fixed rate of interest would be better than the floating rate as the EMI on the latter will increase in this case.

5. Prepayment attracts Penalty

This factor again depends upon the bank. Usually prepayment charges are levied in the initial 2-3 years from the disbursement date of the loan and which declines over time. If you repay the loan out of your own funds, you will not lose much. This does not apply if you opt to refinance your loan from any other bank; most of the financial institutions do waive the prepayment penalty. Mostly institutions allow up to 25% of the loan outstanding to be part prepaid in a financial year, but they can charge anything ranging from 2% to 4% for any amounts paid over the specified limit of 25%.