Home Loans allow us to buy a house using the money we will earn in the future. They are promoted extensively by banks and we are told that they are an entirely normal part of life. A major part of the home loan appeal is the tax break – the repayment for a home loan principal is tax deductible under Section 80 C and the repayment for home loan interest is tax deductible under Section 24 B of the Income Tax Act, 1961. However, before you jump on the home loan bandwagon, take a look at the article below. A home loan comes with hidden charges and fluctuating costs.
- Application Processing Fee
This is usually 1% of your entire home loan value but can be bargained down. For example if your home loan is Rs 50 lakh, your processing fee will be Rs 50,000. Even after bargaining, many banks charge at least 0.5% of the home loan amount as application processing fee.
A part of the application fee is payable even before the home loan is sanctioned. In other words, you might well find yourself having paid the fee but have your home loan application rejected due to some requirement or technicality.
- Legal Fees
Banks hire their own lawyers to create the home loan agreements and associated documents. However, they typically bill you for them. The charges for this can vary but start at around Rs 5,000.
- Home Insurance
Home insurance protects your house from earthquakes, fires, floods etc. Banks make home insurance compulsory and insist that you buy it from their partner insurance companies. The home loan insurance amount is also taken upfront (one-time) rather than an annual payment. The insurance amount is calculated according to the area of your house. For a house of 500 sq ft (carpet area), it would typically amount to around Rs 50,000 for a 30-year loan.
- Life Insurance
This is not sold as a ‘mandatory requirement’ but the home loan agent will try to persuade you to buy it. The argument is that if the borrower dies, the family may not be able to afford the EMIs on the home. In such as case, life insurance will step in. However, note that you might already be covered under many different life insurance policies like term insurance of ULIPs which will pay out in any case on your death.
- Long Tenure
A long home loan tenure is superficially attractive because it means lower EMIs. However, if you look at the cumulative payments you make over the lifetime of the loan, it is the bank who makes more money than you. The longer the tenure, the larger is the amount of interest you pay. You can get an idea of this from loan EMI calculator.
- Variable EMIs
Remember that most loans given out by banks are ‘floating rate’ loans. This means that your EMIs will fluctuate according to the prevailing interest rates in the economy. If you have budgeted for an EMI of Rs 50,000 per month and it shoots up to 55,000, don’t be surprised. The bank’s Marginal Cost of Lending Rate (MCLR) may have moved up, forcing your EMI upwards. Interest rates in India have moved by 1.5% in the past year (from August 2017). How much does this affect your EMI? Try plugging in different interest rates into our loan EMI calculator.