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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
Owning a house is a dream for every family. In fact, as per Maslow's Need Hierarchy, housing comes under the first set of needs known as ‘physiological' needs. Since buying a flat or a house is expensive, there are options such as home loans that have made these purchases easier. Like for any financial product, there are myths surrounding home loans too. Let us try to clear some of them.
Shorter the tenure the better it is
Shorter the tenure, the total interest that you pay on your loan will be less. But a shorter tenure means higher EMI. Make a careful trade-off between the EMI and the tenure so that you are able to pay back installments without burdening your other financial needs. EMI defaults should be avoided, as these reduce your CIBIL rating and substantially reduce your ability to take future loans. Many financial institutions allow prepayment and foreclosure facilities. Therefore, as and when your income rises, you can cut short your tenure through these facilities.
Fixed rates mean security, so they are better than floating rates
Every person has unique home loan requirements. So do not use your friend's home loan experience as a benchmark. The same theory applies to fixed and floating rate loans; the choice depends on a person's risk appetite, income, ability to pay, and age.
Floating rates depend on the modalities of the market and fluctuate on the basis of MCLR (Marginal Cost of Funds based Lending Rate). Understanding the complexities of the jargons and terminologies is essential for a consumer.
When teaser rates (where the borrower is charged a fixed rate initially, which changes based on the market later) came into being, fixed rates were generally less than floating rates. At present, floating rates are less than the fixed rates.In a nutshell, you should take a call basis your financial health, risk appetite and comfort zone.
Increase in interest rates will increase the EMI
Interest rates are based on MCLR (Marginal Cost of Funds based Lending Rate), and any change in the repo rate or other borrowing rates will affect the ‘floating interest rates'. The RBI modifies repo rates to keep the economy on the right track. With this, interest rates may rise or fall. While a fall is always welcomed by buyers, a rise worries them.
First, the increase in interest with increase in interest rates is not drastic; secondly banks offer facility to increase the tenure so that the borrower can pay the loan EMI comfortably
Lowest interest rate is the best offer
While securing a home loan, you need to consider many factors, including interest rates. Every bank has its own home loan norms and a low interest rate might not actually benefit you in some cases for ex: if interest rates are lower but tenure offered is less or Processing fee is higher or there is no special women offer or if there are any other hidden charges. Hence you need to take a decision keeping in view all your requirements and not just the lowest interest rate.
This Article is for information purpose only. The views expressed in this Article are personal and do not necessarily constitute the views of Kotak Mahindra Bank Ltd. and its employees