You need to understand what product type and features best suit your financial needs.
In my recent conversations with women around me, I have realized most of them are aware that they should have a better understanding of their finances especially their home loan investments, but not many are doing much about it.
Many have not given so much importance to investments and it wouldn’t be useful to urge women to get up and take control over their loans, without explaining the impact and its process.
This is one of the key reasons that I decided to pen down general misconceptions and queries that women generally have as far as their home loan investments are concerned. With the interest rates touching the roof, the EMIs have again become a cause of concern amongst the borrowers.
The impact has been telling on many household’s finances, which are already under strain due to the rising living expenses. Without understanding the clauses, you could become a victim of some general misconceptions about loans and shut out ways to lighten the EM burden.
Here are five myths that women are generally unaware of.
- In order to close loan soon you should take one with the shortest tenure.
You should take a bird’s eye view on your financial health. With fluctuating interest rates, individuals tend to invest in loans for a short period; with a belief that it would protect them from the modalities of the market. This is a lethal mistake people commit, by taking a loan for short term they increase the quantum of their EMIs.
Thus reducing the liquidity in their accounts and the ability to make another major investment (or take another loan for that matter), this over commitment can also lead to long term repercussions like defaulting payment of EMI.Instead it is advisable to take a loan for longer period of time and use the available liquidity to pre pay the loan.
- Hike in interest rate means inflated EMIs
The immediate reaction of borrowers to an upward treading bank base rate (base rates are the benchmark set by the RBI for the bank below which they cannot set their interest rates) – and the resulting rise in home loan rate – is that it would push up their EMIs, wreaking havoc on their monthly installments.
In fact, most banks, subject to conditions, usually extend the tenure of the loan and keep the EMI amount unchanged. This decision is taken by banks basis a borrower’s property, income and so on. Even here if a borrower does not wish to prolong their loan repayment they can inform the bank about their willingness to service a higher EMI.
- Loans with lowest interest rates is the best deal
The banking sector in India has become extremely competitive in nature; hence banks ensure that the borrowers get the best services and have started offering similar interest rates. The key in such situations is to understand what product type and features best suit your financial needs and objectives first and then figure out the cost rather than just the low interest rate being the sole decision making factor.
Moreover, low interest rates may mean lower EMIs, but it may not serve an individual’s purpose if the sanctioned loan amount does not meet his/her requirement. If your loan eligibility as per lender’s evaluation norms falls short, the low interest rate will be little consolation.
- Fixed rates are better than floating rates
Home loan requirement for each person is as unique to ones need hence your friend’s home loan experience should not be used as a benchmark. The same theory applies to fixed and floating rate loan; the choice of the same completely depends on a person’s income, ability to pay and the age.
Floating Rates depend on the modalities of the market and fluctuate on the basis of factors like repo rate, Marginal Standing Facility (MSF), Statutory Liquidity Ratio (SLR) and a number of other factors (this is not the case with fixed rates). Understanding the complexities of these jargons and terminologies are important to be understood by the bank.
When teaserrates (Initial few years the borrower would be charged a fixed rate of interest and after a point it the rate of interest would change basis the changes in the market) came into being the fixed rates were generally less than the floating rate, currently the scenario is upside down floating rates are relatively less than fixed rates. In a nutshell person should take a call basis his financial health and comfort zone.
- I don’t need to have my income documents for taking a home loan if I am mortgaging my high-cost property.
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 recent fluctuations in the market apart from creating havoc in the household expenses have created flux for people’s financial projections.
In such a scenario I advise my clients to seek expert advice; prior to purchasing any financial product especially a home loan.
The author is prominent financial consultant
Image courtesy:©Thinkstock photos/ Getty images
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