With interest rates going up, the equated monthly instalments, or EMIs, have again become the talking point for many home loan customers. The impact has been telling on many household's finances, which are already under strain due to the rising living expenses. While higher EMIs are a cause for consternation for borrowers, there could be relief in the form of certain clauses in the home loan contract.
Without understanding the clauses, you could fall victim to some general misconceptions about loans and shut out ways to lighten the EMI burden.
Here are five myths regarding home loans that you need to be aware of:
1: Hike In Interest Rate Means Inflated EMIs
The immediate reaction of many borrowers to an upward revision in a bank's base rate – and as a result the home loan rate – is that it will push up their EMIs, wreaking havoc on their monthly finances. This, perhaps, is the biggest myth of all, especially when the rates are hardening. In fact, most banks, subject to conditions, usually extend the tenure of the loan and keep the EMI amount unchanged.
"Over an interest rate cycle, the tenure could go up and down, in line with the changes in the applicable interest rate," says Suvrat Saigal, consumer banking director, Barclays Corporate India. "However, the decision depends upon factors like the age of the borrower and the property, his/ her income and so on."
By default it's the tenure that is extended and the EMI amount sees no impact. Therefore, if you do not wish to prolong your loan repayment, you need to inform the bank about your willingness to service a higher EMI.
Remember, you are not helping your finances by extending the tenure.
"You actually pay a lot more in interest," suggests Vipul Patel, Home Loan Advisors. "It is generally recommended that you should try and part prepay, refinance or increase the EMI amount to ensure that the loan tenor can be reduced. Loan extension should be considered only in exceptional circumstances," he says.
2: Pre-Payment Always Attracts a Penalty
Not always. "Typically, it is levied during the initial 3-5 years of the loan. The charge levied declines over time," says Saigal of Barclays India. "The nature, of course, varies as per the bank or the financial institution. Some banks may choose to charge it, some may not."
If you choose to repay the loan out of your own funds, you will have little to lose. As long as you have not opted for a home loan refinance from another lender, most financial institutions waive the prepayment penalty. "Most institutions allow up to 25% of the outstanding loan amount to be part prepaid in a financial year, but will charge anything from 2% to 4% for any amounts paid over the specified limit of 25%," says Patel. "This is not aligned to the NHB circular dated October 18, 2010, which clearly says that there should be no charges in case prepayment/part prepayment/foreclosure is done with own funds." So, go through your sanction carefully to ascertain your lender's position.
3: Loan with Lowest Interest Rate Is The Best Deal
It may mean lower EMIs, but it may not serve your purpose if the loan amount sanctioned to you does not meet your requirement. If your loan eligibility as per the lender's evaluation norms falls short, the low interest rate will be little consolation. Also, you need to go deeper to ensure that the bank is indeed offering you the best deal. "I would urge customers to study charges like processing fee, inspection and valuation charges, etc, carefully," says Saigal.
While some banks charge a flat consolidated fee, others break it up into several categories.
"At the entry point, the rate might look attractive, but there could be a number of strings attached such as higher fees, penalties on pre-prepayment and lower or no flexibility," says Patel.
"The key is to work out what product type and features best suit your financial needs and objectives first and then focus on the cost."
4: Bank Isn't Concerned About Employment Status
On the contrary, it is. "The home loan agreement stipulates that the borrower should keep the bank informed about change in employment, job loss, retirement, etc, within seven days," says VN Kulkarni, chief counsellor, Abhay Credit Counselling Centre.
The relevant, although rarely used, clause states: "Upon the borrower opting for retirement or ceasing to be in employment for any reason, then, notwithstanding anything to the contrary contained in this agreement or writings or any documents, the entire amounts payable under the said loan shall, at the bank's option, become forthwith due and payable by the borrower from the amount/s receivable by him from the employer."
"While the clause exists, usually the bank and the borrower, through negotiations, arrive at a revised repayment schedule based on the borrower's financial behaviour and repayment pattern," says Saigal.
5: Property Insurance Is Not Borrower's Responsibility
You could be in for serious trouble if you believe so. A standard clause, yet often overlooked, in most home loan contracts is that the mortgaged house should be insured against fire and other natural calamities.
"If the borrower shall make any default in insuring and keeping insured the said property, the bank may without prejudice to its rights and without being bound to do so, insure and keep the same insured by debiting the loan account of the borrower. Such amounts shall also carry interest at the rate aforesaid," reads the clause.
"However, if you live in a co-operative housing society, which has insured the entire complex, you may be exempted," says Kulkarni. Those who live in individual units like bungalow or a row house should ensure that they carry out this task.
