Home loan is a financial instrument especially designed to fulfill the necessity to own a property when the borrower is unable to pay the entire cost of the property at once. The Bank/ NBFC’s provide up to 80% of the buying cost of the property and receive EMI payments over the loan tenure to recover the loan amount. A home loan is a unique among the other available financial instruments due to its long tenor (usually more than 15 years) and the large amount of loan which is given to the borrower. However, being universally available financial product, there are numerous myths that creates lots of confusion and misguide the perspective borrowers. The following are top 3 home loan myths and the truth about them:
The Truth: Fixed rate home loans do not prove to be the best deal always. Sometimes floating rates are also good depending on the case.
The rate of interest charged on home loans are broadly classified into 2 categories – floating and fixed. In case of a floating rate home loan, the applicable interest rates are reviewed periodically and are liable to change during the loan tenor. Therefore, the EMI payable will differ over the time in case of a floating rate home loan. On the other hand, a fixed rate interest loan, as the name suggests, does not change over time; hence, the borrower has to pay the same amount every month as an EMI. There is a catch though – fixed rate loans are also revised periodically and the EMI payable may increase if the rates are increased by the Banks/ NBFC’s. Additionally, when the interest rates are low, such as the present scenario of the market, floating rate loans are more competitive than fixed rate loans. This means that the borrowers can benefit due to the lower EMI.
The Truth: Buying a new house or flat is only one type of property purchase where the home loan can be used.
Actually the terms “home loan” or “housing loan” are used to refer to a bouquet of almost 10 different financial products that includes but not limited to land purchase, home extension, home purchase, home renovation, NRI home loan, etc. Most of all the home loans have different eligibility criteria and loan amount that may be availed for the intentional purposes only. The tax benefits also differ from one type of home loan to another. For example, tax benefits are exempted when a loan is availed to buy a plot whereas tax benefits can be availed when a loan is borrowed for a home construction or a home purchase.
The Truth: The tax deductions in home loan include both principal repayments and interest payments.
Home loans such as home construction loans and home purchase loans offer double tax benefit to the borrower. The borrower not only can claim tax deduction under Section 80C on the principal amount of the loan but can also claim additional tax deduction under Section 24 on the interest paid towards the repayment of the loan. On the other hand, a home improvement loan only includes the tax deduction on the interest paid under Section 24. While borrower the borrower should also keep in mind that certain housing loans such as plot loans does not have any tax deduction benefits whatsoever the case may be.