Customers looking to borrow home loans either apply from banks or non-banking housing finance companies (NBFCs). However, seeking loans from any of them involves myriad factors that one must know.
Choosing between banks and NBFCs for home loans
Currently, there are numerous commercial banks and housing finance companies (HFCs) offering home loans to their customers. With so many lending institutions available to make offers, borrowers do not find it difficult to either apply for loans or transfer their loans from housing finance companies.
Navin Chandani, CBO, BankBazaar, says, “Banks have very stringent eligibility criteria, and often people, especially first-time borrowers, may not get a home loan from a bank due to a lack of credit history. It could also be that the loan amount the bank is willing to sanction is lower than expected. Today’s NBFCs have lower eligibility criteria compared to banks, and therefore, borrowers may prefer to take a loan for the required amount from an NBFC. However, this comes with a cost, usually in the form of a higher rate of interest. So, once they have completed a year or so and built up a credit history as a reliable and prompt borrower, they may opt to switch their loans to a bank at a lower interest rate.”
“While this can be a smart strategy, you should not change lenders indiscriminately as every refinancing has associated costs in the form of processing fees, etc. This can eat into your savings on interest cost if you are careful,” said Chandani.
Seeking home loans from banks or HFCs or transferring loans from the latter to the former have their inherent benefits.
Benefits of seeking home loans from banks
Lower interest rate: The RBI has mandated banks to follow the Marginal Cost of funds-based Lending Rate (MCLR) model, thus, necessitating the latter to link the home loan rates to the marginal cost at which they borrow. CS Sudheer, founder & CEO, IndianMoney.com, says, “The MCLR is the minimum interest rate, below which banks cannot lend. The MCLR impacts floating rate home loans and, thus, a cut in repo rate makes home loans cheap. The RBI has cut repo rate by 35 bps in the recent policy meet, allowing banks to cut MCLR, bringing down the home loan rates.”
Additionally, banks are required to pass on the benefits of lower interest rates to their customers quickly in contrast to the HFCs. This means that it takes more time for HFCs to renegotiate their home loans at lower rates compared to banks. Suresh Sadagopan, founder, Ladder7 Financial Advisories, says, “The cost of funds is much lower for banks as they have access to Current account/ Savings account (CASA) whereas the cost of funds for HFCs is higher as they don’t have access to CASA. For that simple reason, HFC rates will be higher than banks.”
Overdraft facility: This is one facility that allows borrowers to repay their home loans quickly in the event of having surplus funds in hand. Explaining how home loans with overdraft facilities are linked to the borrowers’ accounts, Raj Khosla, founder and managing director, MyMoneyMantra.com, says, “A home loan is a long-term financial commitment and may entail interest costs more than the principal itself. An overdraft facility is an excellent tool to minimise interest costs. Realistically, you will always generate surplus cash flows ever now and then. These surpluses can be deposited in the home loan linked bank account, thereby, reducing interest outgo. Furthermore, an overdraft facility enables you to effect withdrawals whenever required.”
Why choose HFCs over banks for a home loan?
1. Credit scores don’t matter: Banks as compared to HFCs prefer to lend to borrowers with higher credit scores. This means that you have fewer chances of getting loan from a bank if you have a lower credit score. However, this may not hold for HFCs. Pavan Gupta, CEO, Muthoot Housing Finance Ltd, says, “HFCs are not too rigid about credit score. They take into consideration the practical aspect to understand why the score is low. HFCs look at the situation pragmatically and help their customers accordingly.”
2. Higher amount of loan: Though banks offer loans at lower interest rates, most of them refrain from including the stamp duty and registration costs when considering the property’s market value. In the case of HFCs, Deo Shankar Tripathi, MD & CEO, Aadhar Housing Finance, says, “Loan eligibility is based on two main criteria including the Loan to Value Ratio (LTV) and repaying capacity of the customer as per his/her annual cash flow. Both banks and HFCs have the same LTV criteria. HFCs are a little flexible while assessing income based on well-defined surrogate methods which increase the loan eligibility with regulated LTV eligibility.”
3. Simple documentation: Banks follow a strict documentation process, which means that the chances of getting a home loan are lower in case if you do not have your documents in place. On the other hand, HFCs tend to be more relaxed about this, thus, resulting in a quick turnaround time while granting loans to their borrowers. LIC officials say, “Application for a loan should accompany identity proof like PAN Card, Passport, etc. As proof of income, for salaried individuals, salary slips and bank statements for the last six months along with Form 16 is required. Self-employed or professionals are required to submit ITRs for the last three years along with duly certified documents.”