Is Your Salary Enough To Secure Your Loan? Here’s An Answer To Common Myths About Home Loans

The devil lies in the details, and therefore, before selecting a loan solely based on a lower interest rate, it is important to understand if there are any hidden charges involved

A shorter loan tenure might feel less intimidating and overwhelming, however, it could also be hiding significantly higher EMIs in the details.

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Buying a house is a dream that many of the younger generations have. However, the world of loan applications and choosing from the multiple loan choices out there can get a bit overwhelming. So, it is important to educate yourself about maintaining a healthy fiscal profile and also about the intricacies of a home loan. To understand the whole process, let’s first try to do away with some common misconceptions about securing a loan to buy your dream home. 

The Lure Of A Lower Interest Rate

Interest rate is undeniably one of the most crucial factors we consider when looking for a loan. The general idea is that lower the rates, better the loan option is, however, this formula doesn’t always apply. Sometimes, a low-interest rate figure might not be the best choice, rather it might be the worst option to pick. The devil lies in the details, and therefore, before selecting a loan solely based on a lower interest rate, it is important to understand if there are any hidden charges involved. Your loan could have hidden processing fees, prepayment penalties, and other sorts of charges such as account management. So make sure you read the fine print and decide on your loan after doing your thorough research into the offering.

 Applying To The Banks

Typically, our parents’ generation thinks that the first step in applying for a home loan is to go to the bank and start your enquiry. However, the world has changed and with the push for digitalisation, this step can be avoided altogether. There are financial marketplaces available at the click of a button that offers the facility to compare home loan offers from multiple lenders without having to go through the hassle of physically visiting the bank. Further, these places conduct ‘soft enquiries’ to compare the rates and deal terms being offered by several lenders. On the other hand, going to a lender directly opens you to the risk of ‘hard enquiries’ which can negatively affect your credit score.

Deciding The Loan Tenure

A shorter loan tenure might feel less intimidating and overwhelming, however, it could also be hiding significantly higher EMIs in the details. The satisfaction of closing your loan might fall short in front of the financial strain the high EMIs will have on your pocket monthly. Therefore, it is crucial that when you decide on your loan, you can find a balance between the repayment pace and your affordability.

RBI Is The Decider

The Reserve Bank of India (RBI) makes the call on the broader interest rates in the market. However, individual lenders pick their home loan rates based on a multitude of factors such as the base rate given by the RBI, the cost of funds for the lender, the loan amount, the applicant’s creditworthiness, and the repayment period of the loan. Further, the current market conditions and competition also influence this decision. So while the RBI does set the base for the rates to be decided on, the home loan rates are an individual call that the lenders make. 

Higher Paycheck Translates Into Loan Approval

While a good salary package adds to your loan application, it alone isn’t sufficient to guarantee that your loan will be approved. The lender will assess your application on your overall credit history and the ability to repay the loan. Your application will only be approved after the lender evaluates your credit score, employment history, income stability, existing debts, and the amount of down payment you can make for the loan. In addition to a healthy salary, you also need to pay attention to these factors to increase the chances of your loan being approved. 

Fixed vs Floating Rate Loans

While you might be attracted to a loan with fixed interest rates, it is important to understand the benefits and issues with both fixed and floating rates. Fixed rate loans provide stability and predictability in the EMIs, while floating rates are subject to changes in the market. 

However, a fixed rate loan might have hidden costs and could also become expensive if the interest rates in the market slip during your loan term. On the other hand, a floating rate loan provides more flexibility and the possibility of cashing on a fall in interest rates but also increases the risk of a costlier loan if there is a surge in the market rates. Depending on the market conditions and your risk appetite, you should opt for either choice and always consider your financial goals in the long run before making a decision. 

Penalty On Prepayment

The days of penalties for making prepayments on your loan are gone now. Many lenders provide customers with the option to avail of a home loan with flexible prepayment options, that allow partial prepayments towards the principal amount, without levying any penalty for the same. The lenders often also set a limit on the prepayment penalty to a particular period or percentage of the overall loan amount. So if you think your financial goals will allow you to make the prepayment, opt for a lender that provides you a loan with flexible prepayment options.