Quite a few people are not well versed with the intricacies of finance and how economics work on a financial level. While this knowledge is not important as they only come in handy if you’re involved in the financial sector in some capacity or you really like watching business news channels, they will come in handy if you want to take out a loan to buy a home or a commercial project in BKC.
A common area of many misconceptions is that of home loans. Interest rates soared for a while and the central bank is now working to curb it. This had a marked effect on the financial well being of many people who opted for home loans. They had to cope with the increasing expenses of basic living
Below are a few myths regarding home loans that you should dispose of:
1. Shorter Tenures Are better
While it is advisable to close loans as soon as possible, opting for a shorter tenure in the beginning can result in difficult times. Most people believe that investing in a loan with a short period is a novel method of dealing with see-sawing interest rates. However, taking a loan for a shorter duration will dramatically increase the amount you will have to pay as EMI.
This means that you will have lesser liquidity and probably won’t have the means to make an additional investment if you want to. A higher EMI also means that you are more liable to default on your monthly payments. A better option would be take a loan with a longer tenure and then use the added liquidity to pre-pay the loan.
2. Increase In Interest Rates Equals Increase in EMI
Whenever banks announce an increase in interest rates, people who have taken loans become anxious about the prospect of their EMIs shooting through the roof and start scratching their heads thinking about where the additional money is going to come from.
Banks however, use a different approach. A spike in the interest rate will not make them increase the EMI but will make them increase the tenure in order to cover the extra amount. The bank will base this decision on an evaluation of the borrower’s assets and income. However, if you find that you can deal with additional EMI and do not want to have a longer term, then you can tell the bank of your willingness to pay a higher EMI.
3. The Best Loans Are Those With Low Interest Rates
Competition has made banks offer low and similar interest rates to borrowers. However, offering lower interest rates have increased the amount of fine print included in the offer. This means that there are more stringent evaluation norms and you may find the sanctioned loan amount to be well short of what it is that you wanted.
Lower interest rates do account for lower EMIs, however, if you’re buying something such as a commercial project in BKC, you may find that a lower interest rate will do you little good if you cannot cover the entire amount you wanted in the first place.
4. Fixed rates and Floating rates
The requirement of home loans is dependent upon the idiosyncratic financial situation of an individual. Most people believe that a fixed rate loan is a safer bet than those loans with floating rates.
Floating rates are flexible rates, rates which modulate with modulations in the market. Factors such as Repo Rate, Marginal Standing Facility, Statutory Liquidity Ratio and a number of other complicatedly named factors play an important role in deciding floating rates. Fixed rates are autonomous of such factors.
The method to choosing between the two rates should be as follows. If you want an EMI which is the same for the entire duration of the loan, then pick fixed rates. This will let you plan your finances around your EMI. If you find yourself being able to pay a bit more than your current EMI, then pick floating rates, these rates will vary around a small median. A few months will have lesser interest rates and a few months will have higher rates.
Anthony Wilkins is a financial consultant turned freelance writer. Anthony writes across many platforms and publications, advising people about home loans and what factors will to look for in their individual circumstances. Contact Anthony for advice on procuring a loan for investing into a commercial project in BKC or anything else related to the world of home loans.