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| Home Loan myths | | |
By Harpreet Singh
This article seeks to clear many myths surrounding home loans. I sincerely hope that this article helps home loan seekers in answering some of their queries.
Myth 1: One should wait for property prices to fall before getting into a transaction.
Most people are concerned with rising property prices and interest rates. Our view on this is that as a lay person, who is buying a house for his/her own use, it is very difficult to time the highs and lows of the market. If you have found a house that meets all your primary requirements such as location, proximity to markets, children's school, transportation facilities, budget and space, we recommend you buy it. In the long term, property prices tend to move upwards. Plus, if property prices shoot up from here, your dream house may move out of your reach.
Myth 2: It is better to go for a fixed rate loan as interest rates are rising fast
For anyone taking a loan for a longer period (20 years and above), a floating rate is better, as rates tend to move downwards over a longer period of time. However, for people taking short term loans (for e.g. a salaried person retiring in 10 years taking a 10 year loan), we recommend taking a fixed rate loan. This is because, with the increase in interest rates, the tenure goes up and the customer will not be in a position to pay installments beyond his retirement as his cash flow dries up. Another advantage with floating rates is that they are available at a significant discount to fixed rates. The difference gives enough buffer for at least a 100 basis point increase, which is quite unlikely from this point where interest rates have already moved by almost 200 basis points in the recent past.
Myth 3: A co-applicant or guarantor is required for all home loans
Many banks now offer home loans where the loan is given on the merit of the person taking the loan. In such cases, the lender derives additional comfort by insuring the life of the borrower.
Myth 4: If you have a default on earlier loan / credit card, it is impossible to get a fresh loan today
Lenders understand that the customer's credit behavior differs from a unsecured loan to a secured loan, specially a loan that is secured by self occupied residential property. Many lenders now actively seek out people with average credit history and lend to them by reducing loan amounts and/or pricing the loans higher.
Myth 5: It is not possible for a single woman to get a loan.
Here too the trend is changing. Some banks, like our own, believe working women to be an important constituent of today's working society. Women are respected on their own terms. We offer loans to single woman with one co-applicant or insurance policy. The co-applicant can be mother or father or sister or brother [if unmarried] or husband [if married].
Myth 6: Without financials, it is not possible to get a loan.
Most banks today have income surrogate schemes whereby loans are given on the basis of track records on other loans taken, banking habits, and extent of relationship with the lending institution. Most lenders have very aggressive lending programs whereby people who are not eligible on their declared income get much higher loans. However, the lenders do charge a higher rate on these loans as these loans carry a higher risk.
Myth 7: The home loan market is saturated, with not enough room to grow.
Mortgages as business is still nascent in India as compared to developed countries. Mortgages as a percentage of GDP is just 4% in India as compared to 50% plus in most developed countries. The mortgages market has to grow at least 10 times just to catch up with the rest of the developed world. Also, with our GDP growing at 8-10% every year, the mortgage market has a lot of catching up to do. A lot of people still do not have homes. A recent study showed a shortfall of 2 crore houses in India. The home loan industry will have its hands full to cater to this demand, and the pie is big enough for all the players to share.
Myth 8: It makes sense to pay off your Loan early
Indians by nature are debt averse. However, it really makes sense to continue with the home loan for as long as possible. Taking tax benefits into account, the cost of a home loan, assuming a borrowing rate of 10%, is less than 7%. This is by far the cheapest money available to customers. Today banks are taking in deposits at rates above 8%. Also, although the installment may seem large right now, adjusted for inflation and time value of money, 8-10 years down the line it will be miniscule compared to future incomes. Thus, contrary to popular belief, it actually makes sense to continue with your home loan and invest your surpluses elsewhere.
The author is Head - Branch Banking & Wealth Management Services Centurion Bank of Punjab
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