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Home Loan Myths – Top 7 Myths Every Borrower Should Know

Home Loan Myths
Home Loan Myths

Home Loan Myths as the name suggests are the misconceptions about Home Loan. I tried to found out who all are responsible for home loan myths. My conclusion is that primarily three factors are responsible. The first one is a lack of knowledge of Bank/HFC (Housing Finance Company) employees. Secondly, the people around us who pass half baked information thus responsible for the viral effect of home loan myths. Till date, i have not come across a single person in my acquaintances who told me “I don’t know”.  You can discuss anything and everything on this planet with people around you. They will share their opinion irrespective of the fact whether they know or not. Lastly, the lack of information on the web. To be very honest, it is in the interest of financial institutions not to share complete information with potential borrowers. More the information available, more questions the potential borrower will ask. More questions from potential borrowers mean the least probability to close the home loan deal :). Ignorance of a potential borrower is bliss for banks and HFC’s.

Some of the home loan myths are already discussed by me under various posts in Home Loan section. My thought process is to bring everything under one roof. It will be convenient for readers to go through all the home loan myths in a single post. The objective of this post is to enable potential borrower in taking informed decisions while finalizing a home loan provider. In some cases, the approach of a borrower is that we will transfer home loan after few years. Trust me balance transfer is not that easy and comes at a cost. An informed decision-making at the first place makes life simpler and easier for a borrower. Let’s check out.

Home Loan Myths – Top 7 Myths Every Borrower Should Know

1. RBI Fix Interest Rate of Home Loan: In last one year, RBI has cut the REPO Rate by 1.25%. A REPO Rate is a rate at which central bank i.e. RBI lends money to the commercial banks in India in the event of a shortfall of funds. Most of the queries i received after RBI policy review is that “RBI has reduced Home Loan Interest Rate, but my bank/HFC is not obliging”. Let me clarify that RBI has no DIRECT ROLE in FIXING the Home Loan Interest Rate”. RBI only formulate the policy that increase or decrease the cost of funding for banks. It is one of the biggest Home Loan Myths. A policy change of RBI may or may not change the average cost of funds for banks. A bank may or may not borrow from RBI. The sales team of banks is responsible for this kind of Home Loan Myths as they pitch their product against HFC’s. The base rate of the bank is the average cost of funds.

From April  01, 2016 the Marginal Cost of Funds based Lending Rate will be implemented. If your home loan interest rate will be linked to Marginal Cost of Funds based Lending Rate than interest rate will be more closely related to RBI’s policy. In short, a borrower can say that RBI is fixing my home loan interest rate :) though it will not be 100% true.

2. The title of the Property is Bank’s Responsibility: It is one of the most common home loan myths that approval of home loan means the title of the property is clear. I discussed it in detail in my post, Property Title Search. In layman terms, A home loan can be considered as a personal loan and property papers are just a collateral against the home loan. A collateral is required as the loan amount is huge. A buyer is solely responsible for the title of the property. Though efforts are being made by central govt through real estate bill to put the onus of title of the property on builders. This problem is more prevalent in states where JDA is signed between land owners and builder. Among all home loan myths, this should be taken more seriously by the borrower.

3. Bank DSA or Staff can influence the Home Loan Approval: I am very sorry to say but in many cases, the behaviour of bank staff dealing with a borrower is nothing less than BULLYING. They threaten the borrower that if they do not avail Home Loan Protection Plan, then Home Loan will be rejected. Each of the home loan myths is unique in nature. To demystify this myth, the front end staff of bank or HFC has NO ROLE in the home loan approval process. There is a separate team in the bank for risk assessment/home loan approval. The front end staff only threaten a borrower to complete their insurance targets. Bundling of Financial Products is ILLEGAL, and you can complain to concerned authorities.

4. Longer Home Loan Tenure is Good because of Lower EMI: It is one of the home loan myths with significant financial impact on the borrower. Usually, it is in the interest of the bank to pitch long tenure home loan. It means more interest income for the bank. The sales pitch of a bank in such cases is that borrower will pay lower EMI. The borrower fails to understand the trap behind the same. Higher interest outflow means a substantial increase in the cost of acquisition of the property. Until unless it is necessary, you should keep EMI as high as possible and home loan tenure as short as possible.

5. HDFC Home Loan is from HDFC Bank, and LICHFL Home Loan is from LIC India: This is one of the home loan myths that favours particular HFC’s. LICHFL is a listed company that is only promoted by LIC India. It is not a Govt Housing Finance Company against popular perception. As shared by some of the readers, the sales team of LICHFL pitch home loan from LICHFL as a loan from Govt backed LIC India. Similarly, HDFC Ltd is a sister concern of HDFC Bank & has NO direct relation to HDFC Bank.

6. Avail Home Loan for Tax Deductions: Home Loan Tax deductions is one of the main attraction to avail Home Loan. In many cases, a buyer is forced to avail Home Loan though he/she was not in a need of same. It is one of the home loan myths based on mis-selling and inaccurate representation of the facts. Though i am not saying that this fact is 100% wrong. In some of the cases wherein husband and wife avail joint home loan for the joint property. In such cases, if both the spouses are in highest tax bracket then it might be financially beneficial to avail Home Loan. It is very subjective and depend on a case to case basis.

7. High CIBIL Score means guaranteed Home Loan approval: I resist including reference of CIBIL score in my posts, but it is so critical that i can’t avoid :). Recently one of my readers wrote to me that his Home Loan is rejected despite a CIBIL score of 808. As i keep highlighting that Home Loan cannot be taken for guaranteed. Even in the case of high CIBIL score. CIBIL score is dependent on multiple factors. One of the main reason is a mismatch in income and CIBIL Score. I shared this in my post on Home Loan Rejection.

I can share more home loan myths but tried to cover all the imp ones in this post. Home Loan is a long-term commitment, and a borrower should commit only after due diligence. In any financial transaction, you cannot avoid 100% risk. An informed and intelligent decision making mitigate the risk to a large extent.

Copyright © Nitin Bhatia. All Rights Reserved.

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Dinesh Kodiyattu
Dinesh Kodiyattu
8 years ago

Dear Nitin,

I am a regular reader of your various articles and I should say they are very useful and informative for general public. While reading about home loans, I had a doubt which I would like to clarify.Hope you can advise.

Query: I am an NRI and I plan to purchase an empty residential plot(in Kerala) for about 74 lakhs. What is advisable, to buy outright paying cash, or to partially finance by home loan? I have the cash in FD. Would it be good idea to get loan against FD and buy the plot?

( Please consider writing few articles on these subjects which may be of interest general public who are buyers or sellers of real estate.

1. Buying a property- cash or Loan?
2. Selling a property- How to estimate the selling price
3. Calculating resale price of flats )

Best Regards,

Dinesh Parameswaran

Bahrain

Nitin Bhatia
Nitin Bhatia
8 years ago

As you are NRI and risk is high in land purchase. In my opinion you should avail plot loan from SBI to be sure of title of the property. After availing plot loan, you can close the same in 6-9 months from own funds. Please check my following post
https://www.nitinbhatia.in/real-estate/10-points-consider-buy-land/

I will definitely write on topics suggested by you.

Dinesh Kodiyattu
Dinesh Kodiyattu
8 years ago
Reply to  Nitin Bhatia

Many Thanks for the reply.

Vijay Trivedi
Vijay Trivedi
8 years ago

Nitin ji,I have an query , please guide me…..” After paying agreed
amount as per the agreement (payment schedule) against the flat, if
builder denies to give NOC due to demanded extra amount (which is not in
payment schedule) in the name of “compensation”, Can we called this
amount as an “disputed amount” ? and builder can denies for NOC? on the
ground of “”disputed amount” which is not in payment schedule…..
kindly guide me as an expert…to save us

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Vijay Trivedi

Please let me the state in which the property is located. Rules vary from state to state.

Vijay Trivedi
Vijay Trivedi
8 years ago
Reply to  Nitin Bhatia

1st of all ..thanks Mr Nitin for considering my grievances…. Sir, it’s Utter Pradesh, Noida

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Vijay Trivedi

Ok..In this case property is registered in your name or still under construction. The reason to check is in many cases, builder NOC is required before formation of society.

Vijay Trivedi
Vijay Trivedi
8 years ago
Reply to  Nitin Bhatia

Nitin ji..still under construction, going to give possession… and for possession need NOC from builder

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Vijay Trivedi

In my opinion, NOC is not required and you should not pay for it.

Vijay Trivedi
Vijay Trivedi
8 years ago
Reply to  Nitin Bhatia

Sir, as per my opinion, NOC is required when you registered your flat in the registrar office / authority, without builder NOC we can’t register our property…. am I right ? …. but builder can’t denies to give NOC on the ground of “Extra Amount” which is not in “Agreement” ..can we challenge the same in “Court” ?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Vijay Trivedi

There are 2 scenarios, a property can be registered by the builder or based on builder NOC. The basic purpose of NOC is that builder’s due is cleared by the buyer. Therefore depending on registration process, a NOC may or may not be required. If NOC is required and you have cleared all the dues then builder cannot charge for issuance of NOC. Therefore, your understanding is correct that extra amount cannot be charged for NOC.

In my opinion for faster resolution you should challenge in consumer forum instead of court. Consumer forum will deliver the judgement within 3 months. In court, it will drag for years.

Amit kumar Choudhary
Amit kumar Choudhary
8 years ago

Sir, is it possible to reduce tenure of my lic Hfl home loan by enhancing EMI without part prepayment.

Nitin Bhatia
Nitin Bhatia
8 years ago

Yes, you can submit written request with LICHFL to increase your EMI.

Amit kumar Choudhary
Amit kumar Choudhary
8 years ago
Reply to  Nitin Bhatia

Thanks a lot sir..

Pradeep Suvarna
Pradeep Suvarna
8 years ago

Sir, I have a question for you regarding Pre Approved bank Loan.
I bought a flat on 19th floor from a builder whose project has been approved by SBI. The project is of 23 floor. Till now I have made 20% of the payment as per slab (till 7th floor). Now they are on 8th slab.
I am planning to avail the loan, so I approached the bank.
Now bank says it cannot process the loan because builder has not got the permission for floors above 13th floor.
I am confused like what steps I need to take further?
First they say it is a pre-approved project. Now they are not processing home loan. (what exactly is happening?)
Is the bank right here? Can they not processes the home loan?

N Singh
N Singh
8 years ago

Hi Nitin,

I took a home loan from HDFC in 2011, around 46 Lakhs and have been paying a monthly EMI for about 45 thousand for the last 4 years. When I took the loan I had a job so it was okay for me the pay the EMI and rent but now for medical reasons and also because the job market is not doing too well I have not been working for about a year. So goes without saying that I am feeling the financial strain of paying the EMI. The apartment is in Gurgaon and I was to get possession in Aug 2012 but it’s been four years and looks like the delivery of the house (possession) is still a year away as the builder had stopped construction, he is now dragging work at the site.

My question is that can I get a court order (a stay order from the court) on my EMI payments till I get possession of the apartment. Without a job it is impossible for me to pay the EMI and now also getting difficult to pay Rent. I can send the builder a legal notice and then maybe use that legal notice to get a stay on my EMI till possession.

Please let me know if this is a viable option. Please suggest.

Regards

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  N Singh

The answer will depend on the terms and conditions mentioned in your agreement. Also EMI payment cannot be stopped else you will become defaulter. You can only claim compensation from builder.

Suresh
Suresh
8 years ago

Hi Nitin,

I have fixed home loan for 2 yrs with LIC with 10.1% & rest 13 years for floating. Now one year is completed & should i change homeloan bank as the interest is reduced by RBI from Apr 5th to 9.25% ???

my outstanding as of today is 32.5L & will it be worthy to transfer as there is prepayment charges ??

Thanks,
Suresh

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Suresh

It depends on detailed calculation. Prima facie, you should wait for one year before you balance transfer.

Akshay Pawar
Akshay Pawar
8 years ago

Hi Nitin Sir,
First of all thank you for sharing the knowledge with us. It is very helpful.
I just want to get one advice from you. I have opted for home loan from HDFC for
Loan amount 22 lakh @ 9.45%.
loan tenure 15 yrs.

For the first 3 year I have selected as fixed interest rate type & afterwards Floating int. rate.
Let me know if this is a good strategy or should I go with Floating rate from beginning itself.

Regards,
Akshay Pawar

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Akshay Pawar

You should opt for floating interest from the beginning.

Akshay Pawar
Akshay Pawar
8 years ago
Reply to  Nitin Bhatia

Thank You sir. One more thing may I know what is the IGR term related with the property & approx how the fees will be calculated?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Akshay Pawar

You have not mentioned property location. It seems property is in Maharashtra. Please confirm.

Akshay Pawar
Akshay Pawar
7 years ago
Reply to  Nitin Bhatia

Yes Sir. Property is located in Dombivli, Dist-Thane, State-Maharashtra

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Akshay Pawar

IGR is Inspector General of Registration. The fees will depend on the purpose of registration.

Nitin Bhatia
Nitin Bhatia
7 years ago

1. Banks are more strict. HFC will be bit lenient. You need to check with other HFC’s also
2. It is subjective
3. Yes
4. You can check how builder is calculating and may cross verify from sub registrar office

Considering you requirement, i will prefer HFC.

Himi
Himi
7 years ago
Reply to  Nitin Bhatia

Hello sir,
We have transfer our loan from ICICI to Sbi in Jan 2010 for 8% fixed for 2 years and then floating. Now interest charged is 13.75%.. But the current interest is upto 9:30% We have filed complaint in SBI.. But they will not give any satisfactory answer.. Could you please suggest me what should I do… Could I file a complaint in banking ombudsman bcoz 3 Months are over but bank Employees just avoid it by saying that we have send your application to higher authorities..

Himi
Himi
7 years ago
Reply to  Himi

We have transfer our loan from ICICI to Sbi in Jan 2010 for 8% fixed for 2 years and then floating. Now interest charged is 13.75%.. But the current interest is upto 9:30% We have filed complaint in SBI.. But they will not give any satisfactory answer.. Could you please suggest me what should I do… Could I file a complaint in banking ombudsman bcoz 3 Months are over but bank Employees just avoid it by saying that we have send your application to higher authorities..

ganga bhavani Patri
ganga bhavani Patri
7 years ago
Reply to  Nitin Bhatia

Thanks for your reply sir.I have contacted the branch manager after long conversations finally he sanction 41L including interiors.We have submitted the originals to the bank loan agreement yet to be signed and also requested the bank for 1st disbursement.Now the DSA is asking for MODT at 0.5% of loan amount before going for registration.I knew that MODT is mandatory (as iam following ur blog)but is the charges 0.5%??and how to get that MODT can i get it through online from registrations and stamps department website?Plz Let me know at which stage i have to be more cautious in this registration process?
Thanks in advance sir.

Nitin Bhatia
Nitin Bhatia
7 years ago

MODT is normally 0.2% but may vary from state to state. You cannot check MODT details online. You may demand payment receipt for the same. MODT is charged before registration.

wings of fire
wings of fire
7 years ago

In pnbhfl , current floating interest rate is 9.3 to 10.5 but fixed interest rate 9.25 fixed for 3/5 years and then floating.I choose pnbhfl because here I get the amount i need whereas sbi or ubi give 2 lacs less of my needed amount.

1.Should i go with fixed or floating or fixed + floating?
2.Should i postpone my idea of buying house {sale agreement done} as I don’t get desired loan from bank?
Please advice.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  wings of fire

1 Floating Interest home loan
2. It is your personal decision. Generally, if you foresee any issue in fund arrangement then it is advisable not to go ahead.

wings of fire
wings of fire
7 years ago
Reply to  Nitin Bhatia

I am in Central gov ,my current net salary is 34k , After 3 or 4 months it Will be around 55k as I will switch to another dept ,so I think there will not be any problem in near future.
Thanks a lot Sir for you advice.

Lourdes Rodrigues
Lourdes Rodrigues
7 years ago

Hello Sir,
I hv just recently closed my home loan account with HDFC with the balance payment. The issue here is I made the full & final payment by cheque on 12th of Jan, and my account got debited with the f&f payment as well as my monthly EMI on 15th January (I was told my EMI of Rs.6263/-will be reversed once my cheque gets cleared). On 24th Jan when I went to collect my documents I reminded the Sr. executive abt the EMI, he told me it will be credited to my bank directly which was not done till 31st Jan. On 1st Feb I get a letter (dtd. 25th January) by post stating my excess aMt of 6263/- hs been reversed and credited to my account (mentioning my acct dtls), which was clearly not done. On 2nd Feb after calling d bank they told me they hv despatched a cheque for the same, which was simultaneously rcvd by me. Now the problem here is I feel HDFC is playing smart. (If u see the sequence of the EMI refund issue). Upon opening d envelope Wat I see is that the amt in fig n words r not matching. The amt in words is stated correct, but the amt in figures is printed as Rs.6.263/-. This clearly cannot be a print mistake. I called d HDFC office today to clarify this n I’m told that on their system it shows a comma (,) ie Rs.6,263/- . After a much argument I’m told to submit d chq to the nearest branch as a proof n only then they will credit my acct directly. Pls guide me as to shd I ask the bank to release d amt with interest or it will b done automatically. Pls guide Sir ASAP. THANKS

Nitin Bhatia
Nitin Bhatia
7 years ago

You deposit the cheque and let it bounce. After that file police FIR for cheque bounce.

Lourdes Rodrigues
Lourdes Rodrigues
7 years ago
Reply to  Nitin Bhatia

Oops! Actually I already returned the chq with a covering letter enclosing copy of the 2 letters received by them.

Nitin Bhatia
Nitin Bhatia
7 years ago

Unfortunately now nothing much can be done. You have to wait for their reply.

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