Should you take a home loan from a bank or an NBFC?4 min read . Updated: 15 Jul 2020, 09:58 PM IST
- A borrower buying a standard property will always benefit by taking a loan from a bank instead of an NBFC
- Since interest rates by banks are linked to an external benchmark, they are more transparent and have a swifter transmission of policy rate reductions
Banks are offering home loans at interest rates below 7%. Besides lower interest rates, the transmission of rates is more transparent in the case of banks compared with non-banking financial companies (NBFCs). Last year, the Reserve Bank of India mandated banks to link their floating retail loans to an external benchmark, making it easier for borrowers to know when the interest rate on their loans would change. Tinesh Bhasin spoke to bankers and intermediaries to find out whether borrowers should only look at banks and avoid NBFCs altogether when looking for a home loan.
Apart from the interest rate, convenience also matters
Home loan is a mortgage that could go on for as long as 30 years. Therefore, it is important to consider other factors such as the convenience the lender is offering. It is important that customers are handheld during this journey. Solutions such as 24x7 support, access to the loan account and other information such as interest certificate should be available to customers at the click of a button. These predictable conveniences form a warm and long-lasting relationship, making life simpler for customers.
NBFCs, including housing finance companies (HFCs), have transformed their delivery models in a big way, prioritizing the customer. While customers’ decisions are often skewed towards the interest rate being offered but a crucial aspect they miss is that interest rates are usually floating in nature and will change as per the market conditions.
In the end, however, the customers’ decision should be based on what they prefer while searching for a financial institution.
Banks have more stringent eligibility rules than NBFCs
Since interest rates by banks are linked to an external benchmark, they are more transparent and have a swifter transmission of policy rate reductions. But that can also work against the borrowers in case of a rising rate regime.
As home loans are usually taken for a much longer tenure than other loans and the loan amount is also considerably larger, a small difference in the rates can have significant implication. Hence, home loan seekers should look for the lowest rates available in the market.
But borrowers also need to be aware that banks usually have much more stringent eligibility criteria than HFCs. In the case of public sector banks, which are offering the lowest rates, not only the eligibility criteria are the strictest, the processing time and disbursal takes much longer. Those not able to avail home loans from banks must opt for home loans from HFCs, even if they must pay higher interest rates. They can always look to transfer their home loan to banks at lower interest rates later.
NBFCs have relaxed policies but interest rates are higher
Unlike bank loans that are linked to external benchmarks, loans from NBFCs are linked to the prime lending rate (PLR). NBFCs are free to set the PLR, allowing them greater freedom in setting rates to suit customers demands.
While this can make the loan more expensive and less responsive to market changes, it suits customers and provides them with more options, especially when they fail to meet the loan eligibility criteria of banks. NBFCs have more relaxed policies towards customers with low credit scores, though these come with high interest rates.
In case of home loans, while neither NBFCs and HFCs nor banks can fund stamp duty and registration costs, NBFCs can include these costs as part of a property’s market valuation. This allows the customer to borrow a larger amount.
Selecting a lender involves more than comparing the interest rates. NBFCs bring several benefits to the table, and these need to be considered while making the decision.
A borrower will always benefit by taking a loan from a bank
A borrower buying a standard property will always benefit by taking a loan from a bank instead of an NBFC. Every time the repo rate changes the bank’s home loan rate must change automatically. NBFCs, on the other hand, link their rates to internal benchmarks, which cannot be verified independently.
Even if you start off at the same interest rate at the time of taking the home loan, as time passes the person who has borrowed from the bank will invariably pay a lower interest compared with an HFC.
Take the example of a salaried person, who took a home loan of ₹1 crore on 1 November. The State Bank of India (SBI) charged him 8.3% then (3.15% above the then repo rate of 5.15%). In six months, the rate for the borrower would drop to 7.15% (3.15% above the repo rate of 4%). Whereas, on the same date, if he had taken a loan from HDFC Ltd at the same rate of 8.3% (then HDFC’s RPLR was 16.65% minus spread 8.35%), his loan would be at 7.85% (RPLR of 16.20% minus spread 8.35%).