Decoding Home Loan myths for Indian buyers

25 May 2025

Buying a home is a significant milestone, and for most Indians, it involves taking out a home loan. However, navigating the home loan landscape can be confusing due to widespread myths and misconceptions. Believing in these myths can lead to poor financial decisions or unnecessary anxiety. Here, we decode the most common home loan myths for Indian buyers, helping you make informed decisions on your journey to homeownership.

Myth 1: You Need a Very High Credit Score to Get a Home Loan

Reality:
While a higher credit score (750 and above) increases your chances of securing a loan at a better interest rate, banks and housing finance companies also offer home loans to applicants with scores in the 650–749 range. Other factors like your income, employment stability, and existing debt obligations are also considered.

Tip: Always check your credit report before applying, and if it’s low, take steps to improve it by clearing dues and reducing credit card usage.

Myth 2: Fixed Interest Rates Are Always Better Than Floating Rates

Reality:
Fixed rates offer predictability but are often higher than floating rates. Floating rates, though subject to market changes, can save you money in the long run, especially when interest rates are on a downward trend.

Tip: Consider your risk appetite and market outlook. Some lenders also offer hybrid plans that combine both.

Myth 3: Only Banks Provide Home Loans

Reality:
Housing Finance Companies (HFCs) are also major players in the home loan market. They are regulated by the National Housing Bank (NHB) and often offer more flexible options, especially for self-employed individuals or those with non-traditional income sources.

Tip: Compare offers from banks and HFCs to find the most suitable terms.

Myth 4: Home Loan Prepayment Attracts Heavy Penalties

Reality:
For floating-rate home loans, the Reserve Bank of India (RBI) has directed lenders not to levy any prepayment charges. Fixed-rate loans may have charges, but many lenders have made their prepayment terms more flexible.

Tip: Always clarify prepayment and foreclosure terms before signing the loan agreement.

Myth 5: Home Loan EMIs Never Change

Reality:
If you’re on a floating rate, your EMIs can fluctuate with changes in the repo rate or lender’s base rate. Even for fixed-rate loans, periodic reset clauses can alter your EMI after a few years.

Tip: Understand the terms thoroughly and keep a buffer in your monthly budget for such changes.

Myth 6: You Can’t Get a Home Loan if You’re Self-Employed

Reality:
Self-employed individuals can definitely avail of home loans. While documentation requirements might be stricter, many lenders now offer tailor-made home loan products for business owners and freelancers.

Tip: Maintain proper financial records and file income tax returns regularly to strengthen your application.

Myth 7: The Longer the Tenure, the Better

Reality:
A longer tenure reduces your EMI burden but significantly increases your total interest payout. While it may seem affordable monthly, you could end up paying much more over time.

Tip: Strike a balance between tenure and EMI so that you pay off your loan faster without straining your finances.

Myth 8: Getting a Home Loan is a One-Time Decision

Reality:
A home loan is a long-term commitment, and you can switch lenders if you find a better deal. Home loan balance transfer options let you refinance your loan at a lower interest rate.

Tip: Periodically review your loan terms and explore refinancing if the savings are substantial.

Conclusion

Home loans are powerful tools that can help you realize your dream of owning a home. However, it’s important to separate fact from fiction. By debunking these common myths, Indian homebuyers can approach the home loan process with greater confidence and clarity. Always do your homework, consult financial advisors if needed, and make informed decisions that align with your financial goals.