Why is a home loan (mortgage) cheaper than gold loan?
My doubt is whether Govt./Reserve Bank of India gives any explicit incentives to banks to offer cheaper home loans ? Currently NO. In the past Loan against GOLD was considered priority sector lending [Loans to poor and agriculture etc]. Every Bank need to lead around 25% to priority sector. Hence quite a few Banks gave loans relatively cheaper to todays rate rather than giving it as Farm loan that almost never get recovered. It is no longer the case now as Loan against GOLD is not considered priority lending. If it were just demand/supply, I feel that gold loans should have been cheaper  It is demand and supply. There are quite a few reasons for this; Why is a home loan (mortgage) cheaper than gold loan? It has to do with risk. Lending money secured by gold is inherently riskier than a loan secure by your home. Increased risk means the lender must charge more. That's why home loans are cheap compared to loans for other purposes. Home loans are secured by the house. Houses are assets that hold and usually retain some value. Houses are easy to track down (they can't be hidden or moved) in the event that you don't repay your loan. Houses are reasonably liquid, they can be resold to pay off a defaulted loan.
What you are seeing is the effects of inflation. As money becomes less valuable it takes more of it to buy physical things, be they commodities, shares in a company's stock, and peoples time (salaries).  Just about the only thing that doesn't track inflation to some degree is cash itself or money in an account since that is itself what is being devalued.  So the point of all this is, buying anything (a house, gold, stocks) that doesn't depreciate (a car) is something of a hedge against inflation. However, don't be tricked (as many are) into thinking that house just made you a tidy sum just because it went up in value so much over x years. Remember 1) All the other houses and things you'd spend the money on are a lot more expensive now too; and 2) You put a lot more money into a house than the mortgage payment (taxes, insurance, maintenance, etc.) I'm with the others though. Don't get caught up in the gold bubble. Doing so now is just speculation and has a lot of risk associated with it. In India, where I live, you can: In addition, housing loans are given priority status as well - bank capital requirements on housing loans is lower than for, say, a corporate loan or a loan against other kinds of collateral. That makes housing loans cheaper as well - you get a home loan at around 10% in India versus 15% against most other assets, and since you can deduct it against tax, the effective interest rate is even lower.  Housing in India is unaffordable too, if you're wondering. In a suburb 40 Km away from Delhi, a 2000 sq. foot apartment, about 1500 sq. ft. of carpet area, with no appliances costs about USD 250,000. This was answered wonderfully in a recent Planet Money podcast:  Why Gold?.  Here are some higlights of gold: If listening to podcasts isn't your thing, read this summary. "Your dad may have paid an ""opportunity cost"" for that outright purchase.  If the money he saved had been invested elsewhere, he may have made more money.  If he was that well off, then his interest rate should have been the lowest possible.  My own father is a multi-millionaire (not myself) and he could afford to have paid for his house outright.  He didn't though.  To do so would have meant cashing in on several investments.  I don't know his interest rate but let's say it was 2.5%.  If he invests that million dollars into something he expects to get a 7% return on in the same period, then he would make more money by borrowing the money.  Hence, he would be paying an opportunity cost. Assuming you need to work, some jobs will also do background or credit checks.  Credit cards can be used by well off people to actually make them money by offering rewards (compared to straight cash transactions).  The better your credit history, the better the cards/rewards you can get.  You can build that credit history better by having these loans and making timely payments." It doesn't rely in the first item. A legal tender law certainly makes it easier for the banker to find goods with his dollars, but you can have the exact same scenario I described above in a competing currency system.  Typically the Cantillion Effect has bankers disadvantaged because they get their interest payment after the inflation effects prices. It is the primary loan receiver who gets the best value. "You get paid interest on deposits because banks only keep a fraction of the deposits on-hand. The rest is put to other uses, such as loaning money to others. If you deposit money and yield 1% interest, the bank is able to fund an auto loan, at 5%. By saving, you are actually making more capital available in the marketplace. ""Fixed"" or ""durable"" assets like gold, real property, or durable goods are different -- their value is based on attributes such as demand (gold, oil) or location (real property). If you bought an apartment in Manhattan in 1975, it appreciated greatly in value over the course of 30 years... but it did so because demand for apartments in New York City grew, while the supply of apartments grew more slowly. The government prints money for two core reasons: Think of it this way: Money is valuable because it is money." As mentioned, the main advantage of a 15-year loan compared to a 30-year loan is that the 15-year loan should come at a discounted rate.  All things equal, the main advantage of the 30-year loan is that the payment is lower. A completely different argument from what you are hearing is that if you can get a low interest rate, you should get the longest loan possible.  It seem unlikely that interest rates are going to get much lower than they are and it's far more likely that they will get higher.  In 15 years, if interest rates are back up around 6% or more (where they were when I bought my first home) and you are 15 years into a 30 year mortgage, you'll being enjoying an interest rate that no one can get. You need to keep in mind that as the loan is paid off, you will earn exactly 0% on the principal you've paid.  If for some reason the value of the home drops, you lose that portion of the principal.  The only way you can get access to that capital is to sell the house.  You (generally) can't sell part of the house to send a kid to college.  You can take out another mortgage but it is going to be at the current going rate which is likely higher than current rates. Another thing to consider that over the course of 30 years, inflation is going to make a fixed payment cheaper over time.  Let's say you make $60K and you have a monthly payment of $1000 or 20% of your annual income.  In 15 years at a 1% annualized wage growth rate, it will be 17% of your income.  If you get a few raises or inflation jumps up, it will be a lot more than that.  For example, at a 2% annualized growth rate, it's only 15% of your income after 15 years. In places where long-term fixed rates are not available, shorter mortgages are common because of the risk of higher rates later.  It's also more common to pay them off early for the same reason.   Taking on a higher payment to pay off the loan early only really only helps you if you can get through the entire payment and 15 years is still a long way off.  Then if you lose your job then, you only have to worry about taxes and upkeep but that means you can still lose the home.  If you instead take the extra money and keep a rainy day fund, you'll have access to that money if you hit a rough patch.  If you put all of your extra cash in the house, you'll be forced to sell if you need that capital and it may not be at the best time.  You might not even be able to pay off the loan at the current market value. My father took out a 30 year loan and followed the advice of an older coworker to 'buy as much house as possible because inflation will pay for it'.  By the end of the loan, he was paying something like $250 a month and the house was worth upwards of $200K.  That is, his mortgage payment was less than the payment on a cheap car.  It was an insignificant cost compared to his income and he had been able to invest enough to retire in comfort.  Of course when he bought it, inflation was above 10% so it's bit different today but the same concepts still apply, just different numbers.  I personally would not take anything less than a 30 year loan at current rates unless I planned to retire in 15 years. tl;dr: when everything is going great, it's not really a problem. It's when things change that it's a problem. Finally, home loans are extended over extremely long periods (i.e. 15 or 30 years), making any fluctuations in their value short-lived - even less reason to be obsessed over their current value relative to the loan. Your post is based on the assumption that you never move. In that case, you are correct - being underwater on a mortgage is not a problem. The market value of your house matters little, except if you sell it or it gets reassessed. The primary problem arises if you want to sell. There are a variety of reasons you might be required to move: In all of these scenarios it is a major problem if you cannot sell. Your options generally are: In the first option, you will destroy your credit. This may or may not be a problem. The second is a major inconvenience. The third is ideal, but often people in this situation have money related problems. Student loans can deferred if needed. Mortgages cannot. A car is more likely to be a lower payment as well as a lower amount underwater. Generally, the problem comes when people buy a mortgage assuming certain things - whether that's appreciation, income stability/growth, etc. When these change they run into these problems and that is exactly a moment where being underwater is a problem. "I am going to respond to a very thin sliver of what's going on.  Skip ahead 4 years. When buying that house, is it better to have $48K in the bank but a $48K student loan, or to have neither?  That $48K may very well be what it would take to put you over the 20% down payment threshhold thus avoiding PMI. Banks let you have a certain amount of non-mortgage debt before impacting your ability to borrow. It's the difference between the 28% for the mortgage, insurance and property tax, and the total 38% debt service.  What I offer above is a bit counter-intuitive, and I only mention it as you said the house is a priority. I'm answering as if you asked ""how do I maximize my purchasing power if I wish to buy a house in the next few years?""" "Why would anyone ever get a 15 year instead of just paying off a 30 year in 15 years? Because the rate is not the same. Never that I've seen in my 30 years of following rates. I've seen the rate difference range from .25% to .75%. (In March '15, the average rate in my area is 30yr 3.75% / 15yr 3.00%) For a $150K loan, this puts the 15yr payment at $1036, with the 30 (at higher rate) paid in 15 years at $1091. This $55 difference can be considered a flexibility premium,"" as it offers the option to pay the actual $695 in any period the money is needed elsewhere.  If the rate were the same, I'd grab the 30, and since I can't say ""invest the difference,"" I'd say to pay at a pace to go 15, unless you had a cash flow situation. A spouse out of work. An emergency that you funded with a high interest rate loan, etc. The advice to have an emergency fund is great until for whatever reason, there's just not enough.  On a personal note, I did go with the 15 year mortgage for our last refinance. I was nearing 50 at the time, and it seemed prudent to aim for a mortgage free retirement." This is fraud and could lead to jail time. The vast majority of people cannot obtain such loans without collateral and one would have to have a healthy income and good credit to obtain that kind of loan to purchase something secured by a valuable asset, such as a home. Has this been done before?  Yes, despite it being the US, you may find this article interesting.     Hopefully, you see how the intent of this hypothetical situation is stealing. "The simple answer is that, even though mortgages can go for 10, 15, 20 and 30 year terms in the U.S., they're typically backed by bonds sold to investors that mature in 10 years, which is the standard term for most bonds. These bonds, in the open market, are compared by investors with the 10-year Treasury note, which is the gold standard for low-risk investment; the U.S. Government has a solid history of always paying its bills (though this reputation is being tested in recent years with fights over the debt ceiling and government budgets). The savvy investor, therefore, knows that he or she can make at least the yield from the 10-year T-note in that time frame, with virtually zero risk. Anything else on the market is seen as being a higher risk, and so investors demand higher yields (by making lower bids, forcing the issuer to issue more bonds to get the money it needs up front). Mortgage-backed securities are usually in the next tier above T-debt in terms of risk; when backed by prime-rate mortgages they're typically AAA-rated, making them available to ""institutional investors"" like banks, mutual funds, etc. This forms a balancing act; mortgage-backed securities issuers typically can't get the yield of a T-note, because no matter how low their risk, T-debt is lower (because one bank doesn't have the power to tax the entire U.S. population). But, they're almost as good because they're still very stable, low-risk debt. This bond price, and the resulting yield, is in turn the baseline for a long-term loan by the bank to an individual. The bank, watching the market and its other bond packages, knows what it can get for a package of bonds backed by your mortgage (and others with similar credit scores). It will therefore take this number, add a couple of percentage points to make some money for itself and its stockholders (how much the bank can add is tacitly controlled by other market forces; you're allowed to shop around for the lowest rate you can get, which limits any one bank's ability to jack up rates), and this is the rate you see advertised and - hopefully - what shows up on your paperwork after you apply." "Why do banks charge a significantly lesser rate for a 15 yr. fixed mortgage than a 30yr. (though they know it will not earn them the same amount of money)?  A simplistic model of where banks get the money to lend to borrowers is that they ""borrow"" money from investors that want to earn a return on the money that they provide.  The actual mechanics of that process are much more complicated, but the gist is that if those investors want to tie their money up for a longer period, they expect to get a higher return, thus 30-year mortgages require a higher interest rate than 15-year mortgages.  In addition, the ""usual"" consensus in the market is that interest rates will rise in the future, so interest rates for longer-term loans are higher  While it's true that the bank gets ""more money"" overall from a higher-rate mortgage, the fact that that additional money doesn't come until several years into the loan (and that money loses value over time due to inflation) makes a lower-rate 15 year mortgage roughly equivalent to a higher-rate 30-year mortgage." The point of what you heard is likely that gold is thought by some to hold its value well, when the money market would provide negative interest rates. These negative interest rates are a sign of deflation, where cash money is worth more in the future than it is today.  Normally, under inflation, cash money is worth less in the future than it is today. Under 'normal' circumstances where inflation exists, interest paid by the bank on money held there generally keeps up with inflation + a little bit extra. Now, we are seeing many banks offering interest rates in the negatives, which is an acknowledgement of the fact that money will be worth more in the future than it is today. So in that sense, holding physical gold 'fights' deflation [or, negative interest rates], in the same way that holding physical cash does [because if you hold onto a $10k bundle of bills, in 10 years you can walk into a bank and it will be worth $10k in future dollars - which in a deflationary market would be more than it is worth today]. Some view gold as being better at doing this than just holding cash, but that discussion gets into an analysis of the value of paper money as a currency, which is outside the scope of this answer.  Suffice to say, I do not personally like the idea of buying gold as an investment, but some do, and partly for this reason. Will citizens advice be able to help me, or am I only going to get told to seek legal advice anyway? They are just advisory. i.e. help/guide people. They are not responsible for any outcome. What can I do as I'm not the person who's made payment or been paid, but I also don't want to cause the estate agent lots of work from my mistake, but legally no bank will talk to me anyway. You are right. You estate agent would have to follow-up with banks [which you have already done]. Will I have to seek legal action or the estate agent? Once you follow-up with the Banks and the Ombudsman, you should proceed to legal. Legally if it is a mistake on your part, the beneficiary is NOT entitled to the money and has to refund it. However establishing this takes a while and hence most of the times beneficiary does not pay back the money that is not rightfully his.