Top 3 Home Loan Myths Busted.
Posted by Anurag Mishra on May 18th, 2017
Home loan is a financial product born out of the necessity to own property when the borrower is unable to pay the entire cost of the property upfront. The lender provides up to 80% of the cost of the house and receives EMI payments over the loan tenure. A home loan is especially unique due to its long tenure (usually greater than 15 years) and the large quantum of loan which is granted to the borrower. However, even in case of this ubiquitous financial product, there are numerous myths that can confuse or misguide prospective borrowers. The following are top 3 home loan myths and the truth about those:
1. The EMIs on Fixed Rate Home Loans do not change; so it is better to opt for them
The Truth: fixed rate home loans are not always the best deal. Sometimes floating rates are better.
The interest rates charged on home loans are broadly classified into 2 categories – floating and fixed. In case of a floating rate home loan, the applicable interest rate is subject to periodic review and is liable to change. Thus the EMI payable will vary over time in case of a floating rate home loan. On the other hand, a fixed rate interest loan, as the name implies, does not change over time; hence, the borrower has to pay the same amount as EMI every month. There is a catch though – fixed rate loans are also subject to periodic revision, the EMI payable may increase if the bank raises rates. Additionally, when interest rates are low, such as they are right now, floating rate loans are more competitive than fixed rate loans i.e. borrowers can benefit from the lower EMI.
2. Home Loans are only for buying a new house/flat
The Truth: Buying a new house or flat is only one type of property purchase that you can perform using a home loan.
The terms “home loan” or “housing loan” are actually used to refer to a bouquet of around 10 different financial products including but not limited to land purchase, home purchase, home extension, home renovation, NRI home loan, etc. Most of these loans feature different eligibility criteria and quantum, thus may be availed for the intended purposes only. The tax treatment also differs from one type of home loan to another. For example, there are no tax benefits when availing a plot loan, while there are tax benefits when availing a home construction loan or a home purchase loan.
3. Home loans offer tax benefits only on the loan principal
The Truth: Home loan tax deductions include both principal repayments and interest payments.
Home Loans such as home purchase loans and home construction loans offer dual tax benefit. Not only can you claim tax deduction under Section 80C on the loan principal, you can also claim additional tax deductions under Section 24 on interest paid towards repayment of the loan. On the other hand, a home improvement loan only qualifies for tax deduction on the interest paid under Section 24. Also keep in mind, certain housing loans such as plot loans have no tax deduction benefits whatsoever.
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About the AuthorAnurag Mishra
Joined: December 13th, 2016
Articles Posted: 108
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