You have chosen your dream home and your builder tells you that the project has been approved by both banks and Housing Finance Companies (HFC). You need a home loan but you don’t know which lender to choose. Banks are more trusted than HFCs but the loan processing might be quicker if you choose a HFC. What should you do? Here are the answers.
“In the stock market, the most important organ is the stomach. It’s not the brain.”
Who said this?
— RupeeIQ (@rupeeiq) October 28, 2019
Are HFCs good enough?
HFCs are not unregulated. They have been regulated by the National Housing Bank (NHB). This is an apex bank that takes care of all HFCs. The companies need to register with NHB. NHB has taken many steps to make HFCs on par with banks when it comes to home loans. These include abolishing of prepayment charges for floating rate loans, setting limits for the Loan To Value (LTV) ratio and checking the provisions made by HFCs for bad loans. So, HFCs don’t fix their own interest rate. They have been well regulated by NHB.
From 2019-20, HFCs will come under the Reserve Bank of India (RBI). The Finance Act, 2019 has amended the National Housing Bank Act, 1987. This had conferred certain powers on RBI for the regulation of HFCs.
In this year’s budget, the finance minister said that HFCs will henceforth be treated as one of the categories of Non-Banking Financial Companies (NBFCs) for regulatory purposes. RBI will carry out a review of the extant regulatory framework applicable to the HFCs and come out with revised regulations.
Are the interest rates comparable?
HFCs follow the ‘Benchmark Prime Lending Rate (BPLR)’ model. Based on their average cost of funds, the HFCs will fix their BPLR. The loan rate is usually at a discount to the BPLR. The discount is different for each HFC and is decided by the HFC.
There are a few problems with the BPLR model. The interest rate is based on the past cost of funds of the HFC. So, borrowers may not get lower interest rate cuts as soon as RBI cuts rates and therefore BPLR may not reflect the present interest rates in the market. Another important point is that the discount decided by the HFC is not transparent. So, customers might feel that the interest rate calculations are not clear.
Are banks better at this? Banks used to follow the Marginal Cost of Lending Rate (MCLR) which was transparent and now they follow the repo rate-linked loan model which ensures that borrowers can enjoy market rates easily. By asking banks to link the loans to an external benchmark, RBI ensures that the interest rate cuts made by it are passed on to customers quickly.
However, you must note that the interest rates offered by HFCs are competitive. For example, HDFC limited, one of the most popular HFCs in India, offers home loans starting at 8.25%. This is one of the lowest home loan rates offered by lenders. State Bank of India, the largest bank in the country, provides home loans at 8.20% only if your loan amount is less than Rs. 30 lakh. For home loans of higher amounts, the interest rates are 8.45% – 8.55%. For non-salaried customers, SBI offers loans at a premium of 15 basis points. So, if you are self-employed and need a Rs. 80 lakh loan, the interest rate will be 8.70%.
HFC or bank?
We are on a downward interest rate cycle and you should look at a lender who can pass on those interest rates to you quickly, correct? Not exactly.
You must understand that interest rate cuts are passed on more quickly to new borrowers. Existing borrowers may not get those cuts for their loans so quickly. They will need to request for lower interest rates and pay a conversion fee for getting the lower interest rate every time they want lower interest for their loan. So, it doesn’t matter how quickly the lender passes on the interest rate cuts.
So, what should you look at?
Home loan is a very long tenure loan that can stretch up to 30 years. Given the situation, what matters is quick processing and efficient service. If you want to get lower interest rates, you need to check how quickly the lender will process your request and the cost of conversion. Some HFCs actually charge lower conversion fee when compared to a bank since home loans are their primary business. You should look at the terms and conditions of loan conversion before choosing a lender. Another point is the loan costs.
Is your loan expensive?
You should look at the processing fees, prepayment fees and the foreclosure fees when you want to choose a home loan. Why? Typically, the average age of a home loan borrower in India is about 35. As these customers progress in their career, they look at closing the loan within 10 to 12 years. With every salary hike, their Equated Monthly Instalments (EMI) look smaller. They are able to pay off their loans easily. Most people won’t like to continue their home loan for 20 years or more. If they repay the loan quickly, they can save on the interest costs too. This is why prepayment and foreclosure fees become important. The higher the prepayment and foreclosure fees, the more expensive is your loan.
There are no prepayment or foreclosure fees for floating rate loans. However, for fixed rate loans these charges apply. There are HFCs and banks that don’t charge fees for prepayment or foreclosure for a fixed rate loan too. So, compare across lenders before choosing a home loan provider.
Note that there might be a waiting period before which you may not be able to prepay. The lower the waiting period, the better it is for you. You can use those salary hikes and bonuses every year to prepay your loan.
Another point that you should check is the waiting period for fixed rate loans. If you opt for fixed rate loans, they become floating rate loans after certain years. This will mean change in interest rate, conversion fees and other terms and conditions of the loan. You should note when your loan will become a floating rate loan. The more you can enjoy lower interest rates with a fixed rate loan, the better it is for you.
You should check if the lender is offering the top up loan facility for your loan. Since your home will be the collateral for the loan and the value of your home will appreciate over time, getting a top-up on your home loan is an easy way to get funds if you need them. Top-up loans are much cheaper than personal loans. If your lender is able to provide a top up on your loan, check the terms and conditions. The lender who offers better top-up loans should be chosen.
Here is a list of all the points you need to consider when you are choosing a home loan provider.
• Interest rate offered (Fixed or floating)
• Interest rate differentials for salaried and self-employed
• Processing fees
• Part-payment fees
• Foreclosure fees
• Conversion fees
• Top-up loan facility
• Service timelines
Want to check EMI details to zero-in on a home loan provider? Try our EMI calculator. You can get details such as the EMI payable, month-wise balance and total interest.