ATM :: Five common home loan truths that you need to know before you sign up for it

Sanjeev Sinha | May 8, 2015, 01.43PM IST | ECONOMICTIMES.COM


Loan seekers often face the dual problem of dearth of credible information and abundance of misinformation that may actually coax them into making the wrong decision when it comes to taking a home loan. Friends and relatives are an immediate source of information, but what loan seekers need is credible and researched data rather than hearsay.

Here are five common home loan truths that you need to know before applying for a home loan:

You may not always benefit from repo rate cut: If you are a borrower who has taken loan before 2010, you might wonder why you have a higher loan rate than the current bank rates. Borrowers who have taken loans before 2010 are gauged by the prime lending rate concept and not base rates. Also, “all floating home loan borrowers do not get the exact rate cut benefits whenever the RBI cuts its repo rate. For instance, this year, the RBI has reduced its rates twice, but many banks are yet to pass this on to their borrowers,” says Adhil Shetty, founder & CEO of

Note: If you are a borrower who has taken loan before 2010 and are having a huge difference in the interest rate than the current rates, you have an option to switch to base rates by paying a fee.

Fixed does not always mean ‘fixed’: Borrowers opting for fixed rates always have a safe feeling. But if you have not gone through the loan documents carefully, you may be in for a surprise at a later stage. Many fixed rate loans offered by banks previously are only partially fixed, and there would be a clause in the loan document that if the rate is increased beyond a certain limit, it will be automatically turned into a floating rate loan. This clause allows banks to re-evaluate and fix the rate of interest afresh after a certain period.

Note: Before taking up a fixed rate interest loan, make sure to check all the terms clearly with your bank.

Banks won’t tell you how much Pre-EMI you will have to pay: You are happy with the rate of interest offered to you. And the monthly EMI outflow specified by the bank official is affordable. But if you are taking up the loan for an under construction property, you will need to pay Pre-EMI for the disbursed amount, until the time the construction is not over. “At some points, pre-EMIs may even shoot beyond the EMI amount. As this expense is not planned for, it can wreak havoc with your financial planning. If there is a delay in the project, you will be shelling out a sizeable amount as pre-EMI, yet your total outstanding loan amount will not be reduced by even a rupee,” says Shetty.

Note: Check with your bank about the possibility of a tranche EMI home loan option. Under this you can start repaying your home loan as soon as the bank disburses the first installment and thereby save on the interest payment.

Banks seek interim security for home loans: Many borrowers who seek loans for outright property purchases are being informed about the need for an interim security at a later stage only. As you take a loan for purchasing a property, the new title deed in your name will be ready only after 3-4 weeks of the registration. But you will be needing money for getting the property registered in your name.

“However, banks would not take a risk to keep the mortgage without any collateral till they get the new title deed. They would ask for another property as collateral for the time period. This lands many first time borrowers in a fix as they have no property to offer as collateral, and will have to seek help of family and friends who would be asked to stand as guarantors in that case,” says Shetty.

Note: Usually public sector banks seek interim security more than private banks.

Banks judge property price as per their index: Often home loan borrowers are surprised at what the banks offer them as a maximum loan amount. Irrespective of what you think is the price for your purchased property, banks have their in-house team of experts and their own real estate index to judge the price of every property. Depending on that price, banks offer home loan usually up to 80% of its value.

Note: Do not assume that bank would finance you depending on what you feel is the property price index. So, it is better to keep a realistic view rather than getting disappointed later.

There is, thus, no doubt that the easy availability of home loans is key to fulfilling the dream of owning a house, but equally there are a significant number of unhappy loan customers because they did not exercise care while signing on the dotted line with lenders. By putting researched information ahead of hearsay and abiding by these simple home loan truths, loan seekers can spare themselves the blushes as they go about constructing their dream projects.

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