It’s a joyous occasion when the request for your home loan gets approved both by a bank and a Housing Finance Corporation (HFC). While banks can be generally be trusted since they are subject to governmental regulation and therefore, hold prestige, doubts may cloud over the very veracity and reliability regarding HFCs. Are HFCs reliable? Do they have fair and established loan practices? Are their loan-acceptance criteria any different from those of a bank? With so many questions in mind and with few answers to actually offset these questions, we take the opportunity to present to you a comparative assessment between banks and HFCs so that it is you who gets to determine which is better or what to go with.
First, let’s categorically dismiss the popular myth that HFCs are unregulated entities. Contrary to accepted perception, HFCs are regulated by rules and guidelines that are set forth by the National Housing Bank (NHB); and this stringency is corroborated by the fact that each HFC mandatorily needs to be registered with the NHB. There have been talks of the Reserve Bank of India (RBI) take over the functions and supervisory role of the NHB, but as of yet nothing of that sort has ever materialized. Moreover, the NHB has been quite active in ensuring that loan borrowers remain in comfort – including taking such steps as abolishing pre-payment charges for floating rate loans, putting an upper limit to the LTV (Loan To Value) ratio and making certain that HFCs have done proper provisioning to make good the loans gone bad. So it’s quite baseless to assume that HFCs are unregulated and they’re free to fix any rate of interest.
Speaking of setting unregulated rates of interest, this brings us to another question loan borrowers tend to ask from time to time. Usually, HFCs follow what’s usually called “benchmark prime lending rate” (or BPLR, for short). This means HFCs would fix a rate of interest, based on the average cost of their funds. This implies that the loan rate fixed by the HFC would actually be at a discount than the BPLR itself. However, there are two issues to consider here: the BPLR is generally based on the past cost of funds or interest rates, and therefore are not forward looking or progressive in any sense. This makes HFCs relatively slow in passing interest rate deductions to customers. The second point to note here is that a lot of HFCs may not actually be transparent with their BPLR.
So now the inevitable question comes to the fore: banks or HFCs? There is no clear answer to the question and everything ultimately boils down to the matter of preference and perspective. We can, at length, provide suitable comparisons and facts that would help you determine the better choice. Since we had been talking about interest rates, let’s continue with it for some time.
Looking at the way HFCs stipulate their interest rates, it could be asked that do banks offer better interest rates. Oftentimes, they do, and this is because banks follow a system called the Marginal Cost of Lending Rate (MCLR). The main benefit of this process is that the RBI can ensure that the interest rate cuts it makes passes on to bank customers through the concerned bank’s MCLR as soon as possible. But, let’s also consider the fact that HFCs are intrinsically completive entities, and offer interest rates that are comparable to (and at times, better than) banks. By way of example, HDFC Limited – one of the most popular HFCs in the country – offers home loans starting at just 8.5%; while State Bank of India – an equally prestigious banking institution – offers home loan interest rates starting from 8.65%, unless if you are a woman (in which case, the home loan rate would start at 8.5%). HDFC is also reputed to have a standard loan process and its interest rates are transparent, too.
You, the reader, might come to the conclusion that what is of moment is that the interest rate cuts should pass on to you from the bank, as quickly as possible, given that presently we are now in a downward interest rate cycle; and it would be wise to prefer a bank over a HFC. It might come as a rude shock, therefore, if we tell you that your surmise may not necessarily be correct; and this is because it’s important to understand that home loans are essentially long term loans. Most home loans usually stretch for a period up to ten years. Hence, given this situation, when interest rates start increasing, banks and HFCs would not delay in passing on that hike in interest rate to its customers. Added to this, you might need to pay a heavier conversion fee for getting lower interest rates right now, and some HFCs actually charge lower conversion fees that are lower than most banks. Another equally important point to keep in mind is this: that interest rate cuts are passed more quickly to new borrowers rather than the existing ones, and when in the event of interest rates spiking, it would be passed on to both new and existing borrowers.
It doesn’t really matter if you get your loan sanctioned from either a bank or a HFC, as long as you have a competitive rate of interest and terms. What would matter, however, are the processing, pre-payment and foreclosure fees. A typical home loan is borrowed by people in their 30s and is closed within tent to twelve years. There are hardly a few loans whose tenures run up to twenty years. This is because as people experience a growth in their careers their salaries go up, and consequently, the EMI tends to become less of a financial burden. This produces a trend whereby borrowers would rather repay their loans quickly than have a higher outgo in the form of interest. And it’s here that pre-payment and foreclosure fees come into play, for a heavy pre-payment fee would entail an expensive loan, and the same happens with a heavy foreclosure fee. There are several banks and HFCs which don’t charge anything for pre-payment or foreclosure, even for fixed rate loans. This has to be considered before you decide on the kind of home loan provider you wish to go ahead with.
Another factor to consider is that many fixed rate loans end up becoming floating rate loans over a period of time, and this can only be discerned only when you carefully go through the terms and conditions of the loan in question. See also if a top-up loan facility is available with your provider, since a home loan usually comes with collateral and the value of your home goes up over time, it’s easy to get a top-up loan on your home loan. Being cheaper than personal loans, top up loans come in very handy if you require funds many years down the line.
The real secret lies in intelligently comparing the various home loan providers and choosing the best of the lot. And the most convenient place to do that? Visit https://chqbook.com for comparing home loan providers and the facilities they have to offer.