Should you take a home loan from a bank or an NBFC?You would find NBFCs more willing to lend even if you have a poor credit score
Adhil Shetty | June 10, 2017 Last Updated at 22:13 IST | Business Standard
Lending rates have trended downwards over the last two years. Currently, several lenders are offering home loans at an interest rate of 8.35 per cent, way lower than the 10-11 per cent rate that prevailed four years ago. For customers this translates into a lower Equated Monthly Installment (EMI) on an existing loan, or allows them to borrow more to finance a bigger home. As they begin the process of short listing a loan provider, customers may find themselves wondering whether they should borrow from a bank or an NBFC (non-banking financial company). Here’s a look at some of the key criteria that will help you make this decision.
MCLR vs PLR
All new loans with floating interest rates offered by banks are now linked to the Marginal Cost of Lending Rate (MCLR). This departure from the base rate regime began on April 1, 2016. The MCLR serves as a bank’s lending benchmark, upon which they charge an interest rate spread. For example, for home loans up to Rs 30 lakh, a leading bank has a spread of 35-40 basis points above its one-year MCLR of 8 per cent. An MCLR-linked loan clearly mentions the intervals at which its interest rate will automatically change. In a falling interest rate scenario, this allows customers to receive RBI-mandated rate cuts in a transparent, time-bound manner. This wasn’t the case with the base rate-linked loans where transmission of rate cuts was weaker.
On the other hand, loans by Housing Finance Companies (HFCs) and NBFCs are not linked to the MCLR. They are linked to the Prime Lending Rate (PLR), which is outside the ambit of the RBI. While banks can’t lend at rates below the MCLR, PLR-linked loans do not have such restrictions. NBFCs and HFCs are free to set their PLR. This allows NBFCs greater freedom to increase or decrease their loan rates as per their selling requirements. This suits customers and provides them more options, especially when they fail to meet the loan eligibility criteria of banks. This also needs to be understood in context of a customer’s credit score, explained below.
Loan to value ratio
The actual cost of property acquisition typically goes up to 105-110 per cent of the property value, including cost of stamp duty, registration, and an assortment of payments towards brokerage, furnishing, repairs, etc. Based on where you are in India, you may pay between 3 and 11 per cent of the property value as registration cost. Banks are allowed to fund up to 80 per cent of a property’s value. For example, if you are buying a property worth Rs 50 lakh, you may receive a loan of Rs 40 lakh from banks. The other 25-30 per cent of your fund requirements would have to be met by you. Often, these last mile costs weigh heavily on the final decision to buy a property. Both NBFCs and banks are not allowed to fund stamp duty and registration costs. However, NBFCs can include these costs as part of a property’s market valuation. This allows the customer to borrow a larger amount as per his eligibility, thus giving the NBFC an edge over competition.
Both banks and NBFCs may bundle products. For example, it’s not unusual for lenders to sell a loan protection insurance plan along with a home loan. The insurance plan helps settle the loan in case the borrower were to pass away during the tenure. Both banks and NBFCs have cross-selling targets. While banks have a much larger range of products to sell, NBFCs push more aggressively to sell third-party products like insurance to bring in more profitability per customer. Compared to banks, NBFCs have a smaller customer base. They have fewer branches and operate in fewer locations. As a result, there is an increased focus on profitability per customer. Customers need to evaluate whether the bundled products are useful to them. If not, they can refuse them and save costs.
Today, there is heightened focus on customers’ credit scores. Increasingly, the interest rate you pay on your loan is linked to your credit score. For example, a leading bank had recently offered its best rates to customers with a CIBIL score of 750 or more. You needn’t wait to apply for a loan to find out your score. You can access one free report a year by visiting the websites of credit rating agencies such as CIBIL or through third-party credit report generators.
If you scan the loan market, you will see that NBFCs have more relaxed policies towards customers with low credit scores. However, with a low score, both banks and NBFCs will likely charge you a higher interest rate. Loan seekers can make the best of both these options. A customer with a low score may start with a loan from an NBFC. Through timely repayment, he can improve his credit score. After this, he may meet a bank’s eligibility criteria and may transfer the loan balance to the bank. If the outstanding loan amount at this point is small, it’s better to continue with the NBFC.
A home loan is typically a long-term commitment with significant interest costs. If you borrowed Rs 50 lakh at 8.6 per cent for 20 years, your total interest paid over the loan tenure will be Rs 54.89 lakh, which is more than the principal borrowed. Therefore, loan holders look to reduce their interest outgo through timely pre-payments. An overdraft (OD) loan facility helps in this regard. An OD loan is linked to the customer’s bank account in which he can park surplus funds. The surplus over the EMI amount is treated as pre-payment towards the home loan, thus bringing down the overall loan liability and interest charged on the balance. Moreover, the customer can still withdraw the surplus as and when he requires it. At present, only banks provide the OD loan facility and NBFCs don’t. This facility is useful to families with the ability to generate regular surplus income, such as a working couple. It is also useful for someone who may be in frequent need of short-term funds, such as a businessman who can withdraw this surplus based on his needs.
Paperwork and processing
Banks have more stringent paperwork requirements for home loans. This is not necessarily a bad thing for the loan seeker. In lieu of the greater scrutiny, he stands to receive an attractive interest rate. NBFCs are known for relaxed paperwork policies and faster processing. For example, in Bengaluru banks will not finance properties that do not have a ‘B’ Khata, but NBFCs will.
The writer is CEO, BankBazaar.com
MANJU AB | Fri, 13 Jan 2017-07:05am | Mumbai | DNA
With property valuation coming off, the attraction to shift to NBFCs for higher loan amount is also waning
Aggressive pricing of home loans by banks and higher income disclosures by customers after demonetization may see a shift of home loans from home finance companies (HFCs) to banks. With property valuation coming off, the attraction to shift to NBFCs for higher loan amount is also waning.
However, the HFCs say the market will expand as the income disclosures will go up and the secondary market, which was predominantly cash, will now go through the white economy, enabling banks and bigger HFCs to capture the market.
Keki Mistry, vice-chairman and chief executive officer, HDFC, told DNA Money, “The market size for home loans will expand as income disclosures will be higher and more customers will get bankable. The cost of funding for banks have certainly come down but no one is going to price a home loan based on temporary deposits like the savings deposits, as these savings deposits are now flowing into mutual funds, insurance and other higher yielding investments.”
Religare Securities said in a report that the ability to assess cash income and a high-risk appetite are key growth factors for NBFCs, “Now, some categories of borrowers whose disclosed income has risen after the note ban may become eligible for bank loans.”
Nearly 80% of the people buy homes directly from the primary market that is builders and most of them pay by cheque. The remaining 20% is the secondary market where cash is a predominant mode of payment.
“Now we can have access to that market as well as cash component is likely to be negligible, and hence the average loan size will go up if the entire value of the property is paid in cheque. Besides banks have CRR, SLR and priority sector that add to their cost. But certainly the silver lining is that due higher income disclosures and the so-called unproductive money moving into the white economy will improve prospects both for the primary and secondary markets,” Mistry said.
Analysts say that even HFCs, especially the larger ones, have seen a drop in their funding cost to the extent of 1% over the last six months.
Religare report said, “Direct selling agents have stated that valuers have reduced loan-to-value (LTV) ratios and raised the haircut assumptions on property value. Pre-demonetization, most balance transfers would take place between NBFCs and also from banks to NBFCs, in order to increase the loan amount or provide flexibility in loan repayment. This has come to a grinding halt as property valuations have come off. ”
Gagan Banga, vice chairman & managing director, Indiabulls Housing Finance, told DNA Money, “We deal with fully banked customers based on disclosed and reported income. Being AAA-rated allows us to borrow from the bond markets at very fine rates and that combined with our significantly lower cost income ratio letting us price loans across products including home loans and loan against property (LAP) on par with banks.”
In anticipation of the property prices correction, customers are going to keep away from purchases or take loans against property. The demand for home loans and also LAP is already slowing down. “The margin expansion story enjoyed by HFCs from lower borrowing costs and a richer loan mix is unlikely to be sustained,” the Religare report said.
Rating agency Icra said in a separate report, “Given that around 60% of the borrowings for HFCs are at fixed rates of interest, and the assets are largely on floating rate, it is likely to get impacted more on account of their relatively higher operating cost ratios.”
Allows 90% loan to value ratio on home loans up to Rs 30 lakh
Friday, 9 October 2015 – 7:10am IST | Place: Mumbai | Agency: dna | From the print edition
Giving a boost to low-cost and affordable housing, the Reserve Bank of India (RBI) on Thursday said banks can provide home loans up to 90% for properties that cost up to Rs 30 lakh.
In a circular, the central bank said that in the case of ”individual housing loans” falling under the loan category of up to Rs 30 lakh, the loan-to-value (LTV) ratio is now up to 90%. Earlier, the facility was available only for properties that cost up to Rs 20 lakh.
This will definitely benefit home buyers who seek to buy properties in the range of Rs 20-30 lakh.
For properties above Rs 30 lakh and up to Rs 75 lakh, the LTV is up to 80% and those above Rs 75 lakh, the ratio is 75%.
The RBI has also modified the provisioning or risk-weights norms for home loans. Reducing the risk weights for individual housing loans to promote low-cost and affordable housing combines well with the government’s declared policy of ‘Housing for All’ by 2022. Banks can now push more housing loans given the lower risk perception of the regulator on the affordable housing segment.
The move by RBI comes in the wake of banks reducing interest rate on home loans following a 0.5% cut in repo rate last week by the central bank.
The move now is the last in a series of measures the RBI has initiated to boost the affordable housing sector. In July 2014, RBI had made home loans up to Rs 50 lakh in metros and Rs 40 lakh in non-metros, given by banks from the proceeds of long-term bonds (of minimum seven years maturity) qualified as affordable housing loans.
The RBI had also promised that it would periodically review the definition of affordable housing, on account of inflation.
Industry officials have pointed out that slashing risk weights attached to home loans and increasing loan amount are definitely going to help home buyers. Many believe that the step by the central bank would also improve customer confidence and provide a trigger to improve the overall sentiment.
However, in markets like Mumbai, where the real estate prices have moved up much above Rs 50 lakh even for affordable houses, this may not bring in any significant change, say the officials.
In its policy review last month, the RBI had proposed to lower the minimum risk weight on housing loans from the current 50%.
“With a view to improve affordability of low-cost housing for economically weaker sections and low income groups and giving a fillip to Housing for All, while being cognizant of prudential concerns, it is proposed to reduce the risk weights applicable to lower value but well collateralised individual housing loans,” it had said.
Lowering of minimum risk weight means that banks will have to set aside less capital for affordable housing loans leading to availability of more funds for the segment.
Source : http://goo.gl/VSwCgt
ADHIL SHETTY CEO, BankBazaar.com | Jul 24, 2015, 11.49 AM | Source: Moneycontrol.com
Manish, a young management professional, shortlisted a property worth Rs. 50 lakh and approached his bank for a home loan. The bank offered him a loan of Rs. 40 lakh only. But Manish had saved only Rs. 8 lakh for down payment and was looking forward to borrow Rs. 42 lakh.
Manish had a high credit score and handsome earnings. Puzzled at the bank’s low offer despite his credit standing, he checked his loan eligibility online, only to find the same bank offering him a home loan of Rs. 45 Lakhs.
Manish then approach a housing finance company. There, he was offered Rs. 42.5 lakhs as loan. This made Manish even more confused as to how the final loan amount is decided and how with same financial credentials, he was being offered different loan amounts.
Many home loan buyers with pre-approved loans face a similar situation today, with their loan applications downsized during later stages or even completely denied in some cases. The situation becomes more complex if the borrowers have no money in hand to pay the down payment or if it happens to stretch their finances.
The culprit here is the LTV, or Loan To Value ratio. Let us understand the puzzling role of the LTV ratio and its significance in the home loan application process.
LTV is used to calculate the maximum borrowable loan amount for any loan applicant based on the value of the property in question. While the borrower’s income plays a key role in determining the loan approval or rejection, LTV comes into account during the second stage of loan processing.
The value of the property will be assessed by the bank’s technical evaluator, based on the market value of properties in that area.
Most banks offer 85% of the property value as loan, while some banks offer only up to 80%. Some banks even offer up to 90-95% of the property value under special conditions.
If you are seeking a higher loan amount for your property (a higher LTV), the loan is considered to be of high risk for the bank. Similarly loans with lower LTV are considered to be of lesser risk.
How LTV can impact your loan eligibility
As in Manish’s case, based on his income, he was eligible for Rs 45 lakh. But as his property is worth Rs. 50 lakh, he was offered Rs 40 lakh by the bank, as they could offer maximum 80% LTV, whereas the HFC offered 85% LTV for the same property. So your final loan eligibility is also based on the maximum LTV as applicable.
LTV does not include stamp duty
While registering a property bought as second sale or as an outright purchase, a sizeable amount is incurred as stamp duty as well as registration costs. However, while processing home loan applications, banks do not consider the stamp duty and other charges along with the final value of the property.
LTV for land loans
While you can avail up to 80-85% funding in a home loan, the number drops significantly for a land loan. For a land loan, the maximum LTV considered by most banks is 70% of the market value of the plot. This means, a lower quantum of loan is available when purchasing a land or plot. Many banks do not offer loans for land purchases in villages or outside corporation limits, thereby resulting in a later stage rejection of the loan proposal.
How higher LTV can dent your top up loan chances
If you opt for maximum LTV for your home loan, this may impact your future top up loan chances. Since top up loans are offered on the basis of the property value as well, banks may not initiate a valuation later, while approving top up loans. Even if you are eligible for a top up loan considering other factors such as your income and repayment track record, if you have availed the maximum loan initially, there are lesser chances of getting a Top up loan.
When banks go for 90% LTV
Banks permit a 90% LTV under certain conditions only. As per the recent RBI guidelines, for promoting affordable housing, banks can offer 90% LTV for loans under 20 lakhs. Another situation where 90% LTV may be offered is when the bank is lending to a builder. If the bank has a tie up with a particular developer, they may up to 90-95% LTV in some cases.
Why land loan offers are based on lesser LTV
Even though land appreciates in value more than an apartment, land loans come with lesser LTV. This is because banks need to safeguard their interest in case of a possible default. Unlike a built house, there is more due diligence in case of plots, as land records are not yet digitized and there can be complexities in connection with legalities due to encroachment issues and others.
For normal home loans, banks offer loans on a ready product. But for ready houses at second sale, value depreciation is always considered while calculating LTV, unlike offering loan for a house under construction.
LTV can be puzzling for a loan applicant. Armed with the appropriate insights, you can ensure that you understand the eligibility process better and calibrate your expectations accordingly.
Source : http://goo.gl/YZ0wFE
K R SRIVATS | NEW DELHI, OCT 18, 2014 | Hindu Business Line
Call this a diwali gift from National Housing Bank, the housing finance regulator, to all future home loan borrowers.
Retail home loan borrowers can now bring in lower amounts towards their initial contribution for availing themselves of housing loans from housing finance companies (HFCs).
Lower upfront contribution
This facility of lower upfront contribution (towards home equity) will be available in cases where the home loans availed from HFCs is above ₹ 20 lakh.
Also, such loans should be supported by a mortgage guarantee cover issued by a registered mortgage guarantee company.
In India, the total HFCs’ portfolio of retail housing loans stood at about ₹ 3 lakh crore. About 55 per cent of this is loans above ₹ 20 lakh.
Under the latest regulatory relaxation, NHB has now allowed HFCs to provide housing loans above ₹ 20 lakh with a loan-to-value (LTV) ratio of up to 90 per cent if such loans are supported by a mortgage guarantee.
This move could affect the pricing of such home loans and encourage HFCs to cut lending rates given that there would be lower default risk thanks to the mortgage guarantee cover.
This would increase potential home owners and add further depth to the retail housing loan market in India.
Simply put, borrowers looking to avail themselves of housing loans above ₹ 20 lakh need to bring only 10 per cent of the loan upfront and the balance 90 per cent could be funded by the housing finance company.
Prior to this latest regulatory change, LTV ratio was limited to 90 per cent for loans up to ₹ 20 lakh, 80 per cent for loans up to ₹ 75 lakh and 75 per cent for loans over ₹ 75 lakh.
“This is a win-win for both the borrowers and the HFCs. This I believe, can be a big game changer and can indeed revolutionize the retail home loan market in the country,” R V Verma, former Chairman and Managing Director, NHB, told BusinessLine here on Friday.
Verma, who had mooted and pushed for this facility when he was at the helm of NHB, also said that the Reserve Bank of India (RBI) should allow a similar dispensation for home loans extended by banks.
For India Mortgage Guarantee Corporation, the only registered mortgage guarantee company till date in India, the move will help it share part of the HFC’s risk on high LTV housing loans and enable HFCs to deploy their capital optimally.
Source : http://goo.gl/cTIWfo