Top five mistakes to be avoided when taking a home loan

Borrowing a loan requires careful planning and analysis. When you take a home loan, this becomes all the more important, since the commitment is for the long-term. You may end up paying more or getting inefficient service if you choose the wrong scheme or bank for your home loan. There are many mistakes committed by home loan borrowers which can prove to be quite harmful for their finances. Here are the top five mistakes:

1 Not researching options well:
Many borrowers do not research about home loan options offered by different banks. Your base bank branch may be offering you a good deal on housing loans. However, it is always advisable to find out the terms offered by other banks. Evaluate not only the interest rate, but also details such as other fees, serviceability and if the bank has lent to other buyers by the same builder. You must consider how long the bank takes to disburse the loan, as this can have a direct bearing on your terms with the builder. Your original home loan documents will be with the bank from where you borrow. So, it is of utmost importance that you make the right choice, which is both economical as well as safe.

2  Borrowing more than you can afford:
Another mistake which most people make is to borrow more than what their income levels permit. While determining your loan eligibility, banks look at your income and liabilities. However, they do not consider your existing expenses. If your existing expenses are high and you take a loan which results in high EMI payment, you may end up in a financial crunch. It is always better to lower your budget if your current income and expenses levels are not favourable. Do a simple calculation of all your fixed monthly expenses. Add this to the amount of EMI on your proposed home loan. If the total expenses are way too close to your monthly income levels, it means you should settle for a less expensive property. It is recommended that all EMI commitments should be less than 40 per cent of your monthly take-home salary.

3  Choosing the wrong home loan scheme:
Over the past few years, banks have come out with different home loan schemes. One such scheme which was quite popular was the teaser loan scheme. The interest rate for the initial one or two years was fixed at a low rate of eight or 8.5 per cent per annum. Thereafter the loan would be charged at a floating rate, which is linked to the bank’s base rate or prime lending rate.
People opting for such schemes should try to understand if they have the capacity to pay the EMI or tenure changes that will be introduced when the floating rates kick in, which can be significantly higher. A lack of understanding or a lack of repaying capacity when the higher interest rate kicks in can only result in difficulty in servicing the loan.

4   Not reading the home loan agreement:
It is very important to read the fine print before signing the dotted line. Almost 80 per cent of home loan borrowers do not take the pains of reading every clause in the agreement. This can have serious repercussions, if the bank official fails to mention something that may be critical for you when discussing the terms orally. A home loan agreement can be cumbersome to read. Nevertheless, what is on paper always holds good. Therefore you must spend some extra time in reading every aspect. Also, it is always advisable to clarify all doubts before you sign the agreement.

5  Not taking insurance cover for the home loan:
You purchase a house for yourself and your family. The home loan for this purpose should not be a burden on your family, in case something unfortunate happens to you during the tenure of the loan. But most borrowers do not recognise this risk and hence they do not take an insurance cover on the home loan. If you do not want to take a home loan insurance, you must at least have a pure life cover that includes coverage for your home loan and other liabilities. This will provide monetary compensation to your family in unfortunate circumstances and they can use this amount to pay off the loan. You should also take a personal accident and critical illness cover.

(The writer is the CEO of BankBazaar.com)