Should you opt for a home loan from bank or housing finance company?
At any point in time, you always have the option to transfer your home loan from HFC to a bank at lower interest rates and other favourable terms and conditions.
Naveen Kukreja, CEO & Co-founder, Paisabazaar.com said that the home loan market in India is serviced by commercial banks and around 99 HFCs. He said, "At any point in time, you always have the option to transfer your home loan from HFC to a bank at lower interest rates and other favourable terms and conditions."
Commercial banks are regulated by the Reserve Bank of India (RBI). On the other hand, HFCs are specialised NBFCs regulated by the National Housing Bank (NHB). They have to procure a certificate of registration from the NHB to be able to lend.
Thus, home loans offered by both institutions might seem similar on the surface, but the loans have distinct features due to the differences in the regulatory environment and fund sources of banks and HFCs.
A. Advantages of taking home loan from bank
1. Banks pass on interest rate changes faster to borrowers
Banks currently follow the marginal cost of funds-based lending rate (MCLR) model which is regulated by the RBI. The RBI has made it compulsory for banks to link home loans to the marginal cost of their borrowing across tenures.
C.S Sudheer, CEO and Founder of IndianMoney.com says, "Banks generally pass on interest rate changes to borrowers faster than HFCs because the former's interest rates charged on loans are linked to MCLR whereas HFCs' rates are linked to the benchmark prime lending rate," says Sudheer.
Kukreja said for a loan taken under the MCLR regime, banks reset the interest rates charged on existing loans when the reset date arrives. Reset date of home loans can be six months, one year or more (usually it is done on an annual a basis). He said, "The reset date has to be communicated to you (borrower) at the time of the loan approval and hence, the MCLR applicable on that date will remain applicable for you till the next reset date."
2. Banks offer overdraft facility
The home loan is a long-term commitment and you have to bear high interest cost. Sudheer says, "Suppose you have availed a home loan of Rs 50 lakh, paying interest of 8.6 percent a year for a tenure of 20 years. You would have to pay interest of close to Rs 55 lakh over the complete home loan tenure, which is basically more than the principal borrowed. People who avail home loans look to reduce interest outgo through pre-payments. This is where overdraft facility helps."
He said that a home loan with the overdraft facility is linked to a home loan borrower's bank account and surplus funds can be parked in that account. The surplus funds over and above the EMI is treated as pre-payments towards the home loan. This brings down the overall loan liability which saves on interest payments. "You can even withdraw the surplus when required. Banks offer the overdraft facility to a home loan borrower but, this facility is not offered by HFCs," Sudheer said.
3. Banks prefer high credit scores but offer attractive interest rates
It is no secret that the documentation of banks is extremely stringent. And if you have a low credit score, it is not easy to get a home loan from a bank. Sudheer says, "Greater scrutiny by banks means attractive interest rates. This is because banks' stringent norms force you to maintain a good credit score to get home loans at attractive interest rates."
Home loan interest rates (Floating) of leading banks and NBFCs
|Public Sector Banks||Minimum home loan interest rates|
|State Bank of India||8.55%|
|Bank of Baroda||8.65%|
|Punjab National Bank||8.65%|
|Private Sector Banks|
|Housing Finance Companies|
|Indiabulls Housing Finance||8.70%|
|LIC Housing Finance||9.25%|
|Dewan Housing Finance Corporation ||9.75%|
|L&T Housing Finance||9.90%|
|GIC Housing Finance||10.25%|
Loan Tenure: Up to 30 years
Maximum home loan amount: Up to 90 percent of the property value
The private sector banks interest rates are slightly higher than public sector banks. Kukreja says, "You should always try to maintain a good credit score (above 750) as some banks like Allahabad Bank, Bank of India and Union Bank of India, have also started offering lower interest rates to those having higher credit scores."
B. Disadvantages of taking loan from bank
- Banks follow a complex process of documentation and hence, they take a longer time to a home loan application.
- If you have a low credit score (i.e., below 750), you may not be able to avail a home loan easily.
- Banks offer a lower loan quantum compared to HFCs; banks generally don't include stamp duty and registration costs while sanctioning home loan on a property value.
Difference between Banks and HFCs offering home loan
|Type of loans||Offers personal loan, auto loan and home loan||Offers specialised mono-line product i.e. home loan|
|Lending rate is based on||Marginal cost lending rate||Prime lending rate|
|Documentation process||Stringent documentation process||Less stringent documentation process compared to banks|
|Interest rates||Comparatively lower than HFCs||Comparatively higher than banks|
|Overdraft facility||Offers overdraft facility||Do not offer overdraft facility|
|Interest rate benefits||Faster in passing interest rate cuts to borrowers as compared to HFCs||Slower in passing interest rate cuts to borrowers as compared to banks|
A. Advantage of taking home loan from HFCs
1. Offer a higher loan quantum
While sanctioning a home loan, an HFC also includes stamp duty and registration costs as part of the property's market valuation. Let's say that the property's market value is Rs 50 lakh. Sudheer says that the average stamp duty charges are 5 percent of the total market value of the property. "The average registration charges are 1 percent of market value of the property. So, stamp duty charges and registration charges come to 6 percent of the market value. This is around Rs 3 lakh on the total market value of Rs 50 lakh," he explained.
"The HFCs include the additional Rs 3 lakh as part of the property's market valuation. Therefore, if the HFC is sanctioning 80 percent of property market value as a loan, you are able to get a higher quantum of loan as you get 80 percent of Rs 53 lakh, which is Rs 42.4 lakh. However, the bank would sanction 80 percent of just Rs 50 lakh, which is Rs 40 lakh. Hence, you will be able to avail a higher loan quantum (borrow a larger amount) from HFCs as compared to banks, based on eligibility," said Sudheer.
2. They are more relaxed regarding credit score
HFCs are comparatively less stringent about credit scores as their higher cost of funds (basically the interest rates) forces them to be more open to loan applicants having lower credit scores. "If you are having a credit score of less than 750, you may still have a chance of getting your home loan approved from HFCs but, at a higher interest rate," said Kukreja.
Deo Shankar Tripathi, MD & CEO, Aadhar Housing Finance said borrowers from the low income or informal segments usually don't have any credit history. "If you fall in such a category and want a home loan, HFCs have set out more advanced parameters or credit scoring models to arrive at your credit score," he said. "HFCs basically have developed their own credit scoring models which they use along with the score of Credit Information Agencies which makes sure they have a larger holistic approach towards judging your (borrower's) creditworthiness."
3. Quick documentation process
Documentation is simpler and turnaround time is also quicker in HFCs. They have less stringent documentation process as compared to banks and also, have speedy process of sanctioning home loans to borrowers.
Tripathi said that HFCs have the flexibility to offer variable loan periods, processing fees as well as competitive interest rates to larger segments of borrowers. "However, the interest rate offered to you by HFCs are generally higher than the interest rates offered by banks," he said.
Overall, HFCs are more forthcoming and flexible while approving home loan applications. So, if you fail to get a home loan from a bank (may be due to insufficient income or you did not meet other eligibility criterion), then you can approach an HFC.
B. Disadvantages of taking loan from an HFC
- Normally, interest rates offered on home loans are higher as compared to interest rates offered by banks.
- Sudheer said that HFCs are slower (as compared to banks) in passing interest rate cuts to borrowers as they base their lending rates against the benchmark prime lending rate or BPLR. He said, "You may not find the process transparent and also you will never know if you got the best rate."
- HFCs do not offer overdraft facility.