Home ownership is increasing in India at an unprecedented pace. And increasingly more new home buyers are opting for home loans to fund their purchase. This is one of the biggest financial commitments individuals take up during their lifetime and a little bit of research and homework can help them save a lot of money in the long term.
You should check your credit report/CIBIL and ensure everything is good before you venture into a home loan. This will help you negotiate with the banks with more confidence.
There are several pitfalls on the path to getting a home loan. Here are the top 5 mistakes you should absolutely avoid:
1. Not factoring in all the charges:
We tend to focus so much on the interest rate that we forget all the other charges the come with the home loans. The biggest ones are processing fees, stamp duty to register the loan and the associated taxes.
The interest rate is indeed the most important part of the loan and will have the most impact on how much the loan costs. But given banks are competing aggressively in the current market there is usually no difference in the interest rate on home loans from top banks for the high value customers.
Banks do differ on other fees and charges and you should calculate your net cost and try to negotiate down the bank. You will be surprised at how flexible they can be.
Some of the charges you should watch out for when you apply for home loan are
Processing Fees : Most of them quote 0.5% to 2% on their websites. You should be able to negotiate them down to 10,000 + tax with some persuasion.
Stamp Duty : This actually goes to the government when the banks register the loan. It ranges from 0.1% to 0.5% depending on which state you are in.
There are a lot of other charges that make your home loan. Here is an article covering all the home loan charges.
2. Not understanding when their rate changes and related charges
Many borrowers do not understand why their floating home loan rates are not decreasing with every rate revision they see in news. Banks only update the rates periodically and you may even have to pay them a conversion fee to change your interest rate from a higher rate to a lower rate.
The rate update cycle also varies bank to bank and they are not very transparent about it. You should ask your bank for conversion charges that are payable when changing your rate of interest rate. Also check on conversion charges for moving from floating rate to fixed rate and vice versa.
3. Going for Over Draft when you don’t need it
Lot of borrowers opt for Home Loans with overdraft option but never really use it. This is a handy option to have but it comes at a price. You pay a higher interest rate than the regular home loan.
If you are salaried with stable income and no foreseen need for a huge amount of cash, you should skip overdraft. It works for businessmen who have fluctuating cashflows and might have an emergency cash need. Also works for executives who get a huge annual bonus and want to park their funds while they find investment options.
So evaluate if you really need overdraft before you sign up for it.
4. Choosing between fixed and floating interest rate
Should you go for fixed interest rate or floating? Fixed interest rates are usually slightly higher than the floating rate but you lock it down for the term of the loan. There is no right answer here and depends on your confidence with the interest rates. If you believe interest rates are going to go down you should go for floating rate. If you think they are going to go up, go for fixed rate.
5. Not going for Insurance cover
When you apply for home loan ensure you also get an insurance cover for the loan amount. Home Loan Protection Plans work best for this case. This will ensure peace for your family if something happens to you during the term of the loan. The insurer will pay the loan outstanding in the event of death of the borrower. This will give the family relief from additional financial stress.