The hidden costs buried in your home loan

Vikas Tarachandani

Buying a home is often seen as the biggest milestone in a family’s financial journey. Most people focus on the down payment, stamp duty, registration costs and an EMI that “fits the budget”. What many borrowers miss is that the real cost of owning a home is often decided by the home loan structure, not just the EMI.

A home loan isn’t just a rate or an EMI to be paid. It’s a long-term contract with several moving parts such as tenure, benchmark, reset dates, fees, bundled insurance and other add-ons. These details can quietly add several lakhs to the total outflow over 15-20 years. Sometimes this happens because borrowers don’t know what to look for. Sometimes, because sales teams are rewarded for closing fast. Often, lenders and agents highlight what sounds convenient upfront, while the real costs stay buried in the fine print.

One of the most common hidden cost traps begins even before the interest rate discussion, at the stage where a borrower chooses a lender. Many borrowers don’t pick lenders purely on pricing. They choose quicker approvals, doorstep service, higher loan-to-value ratios, fewer questions, faster disbursals or a smoother overall experience during a time-sensitive home purchase.

The catch is that these “benefits” are rarely free. They are often packaged with a higher interest rate, additional charges or a less transparent benchmark and reset structure. What feels like a small premium for convenience in the moment can quietly turn into a long-term cost, as the borrower continues paying for that ease month after month across the life of the loan.

Another overlooked factor is how the loan’s interest rate is structured and reset over time. Borrowers often track their “interest rate” but very few track what that rate is actually linked to and how often it resets. The effective rate a borrower pays is influenced by the benchmark design used for the loan, the frequency of resets, and the credit risk premium charged over the benchmark. This creates a subtle but meaningful outcome: two borrowers with the same lender can end up paying different rates for long periods, simply based on when they borrowed and how their loans are structured.

Why spread matters

The most under-discussed part of a home loan is often the spread. Spread sounds like bank jargon, so most borrowers ignore it, but it is frequently the main reason a borrower’s home loan rate stays high even when interest rates are falling. It is the extra margin the bank adds over the benchmark, such as the repo rate. For example, if a borrower’s home loan rate is 8.25%, it could be structured as repo (5.25%) plus a spread of 3%. While the benchmark may fall, the borrower’s spread does not automatically reduce, and banks rarely revise spreads for existing customers on their own. Therefore, older borrowing customers continue to pay the same premium, while new borrowers with similar profiles may receive lower spreads. This is how two similar borrowers can borrow from the same bank and still pay different rates.

Bundled products, especially insurance, are another major source of hidden cost. Insurance is important and often advisable given the size and duration of home loans. The issue arises when borrowers are led to believe that a particular insurance product is mandatory or when the premium is bundled in a way that inflates the financed amount. If an insurance premium is financed through the loan, the borrower doesn’t just pay the premium, rather they pay interest on that premium for years. Even if the EMI impact appears small, the total outflow over time can increase significantly. The worry here more than insurance is how it is packaged, priced and disclosed.

The fee trap

Moreover, fees and charges also tend to be underestimated. Home loans often involve processing fees, legal and valuation fees, documentation charges and administrative costs. Borrowers typically negotiate the interest rate aggressively but don’t always negotiate the fee structure with the same intent. Over the lifetime of the loan, these costs compound and reduce net savings, even when a borrower believes they have secured a competitive rate.

The hidden cost isn’t borrowing but borrowing without clarity. Home loans are not expensive debt in India and are often the most efficient way to finance a home. However, that efficiency depends on the structure. Ultimately, the right loan structure depends on the borrower’s liquidity outlook, financial strategy and personal priorities. What remains universal is that a home loan is a long-term contract, and small structural details can quietly reshape the total cost of owning a home.

The writer is co-founder of SURE, a liability management platform.