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
By Narendra Nathan, ET Bureau| Mar 20, 2017, 04.06 PM IST | Economic Times
Just like bank depositors, those borrowing from banks also need to be alert in order to protect themselves against unnecessary charges. Given below are the most common areas where banks tend to overcharge customers.
If you compare the interest costs of your friends and relatives on bank loans—housing, auto, personal loan, etc.—you will realise that they vary drastically. And these costs not only vary across banks, but across customers of the same bank—and not because of varying customer credit scores. Some banks have been offering loans at cheaper rates to new customers, while charging old customers a higher rate. “Banks continue to follow the discriminatory practice of offering differential rates for existing and new customers and this should stop,” says Ramganesh Iyer, Co-founder, Fisdom.
As the banking regulator, the Reserve Bank of India (RBI) should stop this discriminatory practice, which it is partly responsible for creating. The RBI introduced the MCLR (marginal cost based lending rate) method, effective April 2016, to enable a faster transmission of rate cuts to bank customers, replacing the base rate method that was being used by banks to set their lending rates—earlier the base rate had replaced the less transparent prime lending rate (PLR). Now, borrowers who took loans 4-5 years back, and did not ask their bank to switch to the newer regime, are still linked to the PLR. Those who borrowed when the base rate became the benchmark are stuck with the base rate. Now, while banks are giving new loans at cheaper rates, based on MCLR, old customers are still paying higher rates.
“Since banks offer different rates, it is better to visit some common aggregator and understand the lowest rates available in the market. This will help you bargain better with your bank,” says Dipak Samanta, CEO, iServeFinancial.
To reduce your interest outgo, you need to shift your loan from base rate or PLR to MCLR. Shifting to MCLR now is a good move, say experts. “Though RBI’s stand is neutral now, rates may not go up from current levels. In fact, they may come down later—after an year,” says Balwant Jain, investment expert. Bear in mind though, in an upward moving interest rate regime, MCLR will move up faster than base rates, just like it falls faster in a reducing interest rate regime.
Loan reset charges
There are two types of loans: Fixed and floating rate. Floating rate loans are supposed to mirror the rise and fall in interest rates set by the RBI. But this rarely happens. While banks increase rates immediately, they are very slow in cutting them. The introduction of new benchmarks has also turned out to banks’ advantage. They charge customers for shifting from one benchmark to another— from PLR regime to base rate regime to MCLR regime now. The charges are levied to meet the expenses involved in drafting and registering new agreements—stamp duty, registration charges, etc. Though these expenses vary across states, ordinarily they won’t be more than 0.2% of the outstanding amount. However, some banks try to profit from this also by charging around 0.5%.
Should you go for a reset even if it involves a small charge? Yes. The amount you save will be significantly higher over the years. To illustrate, consider the case of a home loan borrower with Rs 50 lakh outstanding loan amount and a 15-year tenure. A 1% fall in interest— from 9.5% to 8.5%—will bring his EMI from down from Rs 52,200 to Rs 49,250, a reduction of Rs 2,950 per month. A total saving of Rs 5.31 lakh—significantly higher than the reset fee of Rs 25,000 even at the maximum rate of 0.5%. You may be able to get this reset cost down by negotiating with your bank. A threat of shifting to another bank often works. “Another way is to approach the branch manager. Based on the value of your relationship, they can reduce or even waive charges,” says Samanta. The ‘value of relationship’ here is crucial. If you have multiple relationships with the bank—savings bank account, credit card, other loans, investment, etc.—you have a valuable relationship and will receive a favourable treatment.
Source : https://goo.gl/FBRCpI
RADHIKA MERWIN | 20th Feb 2017 | The Hindu BusinessLine
With the RBI signalling the end of the money easing cycle, sharp fall in rates is unlikely
There has always been a lot of fanfare and expectation around the Reserve Bank of India’s monetary policy. Borrowers make a hard case for rate cuts. Depositors cringe every time rates head south. And banks are chided for being tardy in lowering lending rates.
The reaction to the recent policy was however more muted though, with the RBI keeping rates on hold. Also, after reducing policy rate by a whole 175 basis points since the beginning of January 2015, the RBI appears to have changed course, signalling the end of the rate cut cycle.
Here’s what borrowers — old and new — should do to ensure they get the best deal on home loans, before the tide turns.
Are you waiting for rates to fall further before taking a home loan? Sorry to dash your hopes, but it may not be the best choice to play the waiting game .
Lending rates have already dropped by nearly one percentage point over the last one year,thanks to the new marginal cost of funds-based lending rate (MCLR) that the central bank introduced in April last year. This new lending rate structure has forced banks to lower rates at a faster pace.
Starting April 2016, lending rate on your floating rate home loan has been pegged against the MCLR which replaced the erstwhile base rate. As a borrower, you need not be bogged down by the complex difference between the two. Suffice to say that banks use the latest rates offered on deposits for MCLR computation, and hence the rates have fallen sharply in the past year, particularly post-demonetisation.
While the RBI has indicated a wee bit of a headroom to cut rates, don’t count on it and lose out on best deals. SBI, in January, shook up the home loan market by lowering its one-year MCLR (against which home loans are priced) from 8.9 per cent in December 2016 to 8 per cent in January 2017. Other banks too followed suit.
Bank of Baroda’s home loan at its one-year MCLR of 8.35 per cent seems the top draw for now. This home loan product is unique as it links the rate on your home loan to your credit score. If you have been settling your bills and loan payments on time, and have a credit score of 760 and above, then you are eligible to get home loans at this rate.
Other leading banks, for now, offer only one rate for all borrowers, irrespective of the credit score. Central Bank of India and Union Bank of India offer home loans at 8.5 per cent and 8.6 per cent respectively. Others such as SBI and Axis Bank price their home loans at 8.65 per cent.
Rates have fallen by one percentage point over the past year
Rate hikes cannot be ruled out in the medium term
Few banks offer waivers to switch to cheaper loans
Make the switch
While new borrowers have had a lot to cheer, old borrowers — who have taken loans against the erstwhile base rate prior to April 2016 — have not had much respite. While banks have been slashing MCLR, they have not lowered their base rate. SBI, for instance, after holding its base rate at 9.3 per cent from October 2015, has only recently reduced it marginally by 9.25 per cent. This is still far higher than the one-year MCLR at 8 per cent.
Hence, old borrowers still pay a far higher rate on their home loans. In case of SBI, few borrowers still pay 9.5 per cent interest (spread of 25 basis points over base rate).
Banks, however, allow borrowers to switch into the new MCLR regime at a cost. The switching charge is 0.5 per cent of the loan outstanding in most cases (minimum of ₹10,000). If you have an outstanding loan of ₹50 lakh with SBI, with a remaining tenure of 15 years, you could save over ₹4 lakh of interest over the entire tenure of loan.
But do take note of the switching options that each bank offers, before deciding to move. Remember that lower the loan outstanding and tenure, lower the benefit. Hence, it will make less sense to switch if you are at the fag end of your loan tenure.
If you are looking to switch from one bank to another, keep in mind that you have to foreclose your loan, and then approach a new bank for a fresh loan. Here, banks usually charge a processing fee, which ranges from 0.5 to 1 per cent of the loan. There could be an additional service charge too. But do look for waivers offered by banks.
Whether you have a home loan under the erstwhile base rate or MCLR, time you braced yourself for possible rate hikes too. If inflation risks heighten, rate hikes could be in the offing over the next 18-24 months.
If the new MCLR structure has forced banks to lower rates at a faster pace during the rate cut cycle, it can no doubt pinch you quicker when rates move up. This is because lending rates may increase at a steeper pace under MCLR.
But this is all the more reason why you should move to MCLR now. The far cheaper rates currently offered under MCLR (compared to base rate) will help cushion the rise.
Also, borrowers may find some solace in the reset clauses under the MCLR structure. Unlike under the base rate system where a revision in base rate was immediately reflected in the lending rates of all loans benchmarked against it, under the MCLR-based pricing, lending rates are reset only at intervals corresponding to the tenure of the MCLR.
In case of home loans, since the loans are benchmarked against the one-year MCLR, lending rates will be reset every year.
(This article was published on February 20, 2017)
Magicbricks | Jan 30, 2017, 03.39 PM IST | Times of India
Banks have adopted the Marginal Cost of Funds based Lending Rate (MCLR) by replacing the base rate system, starting April 1, 2016, as per the Reserve Bank of India’s (RBI’s) guidelines. Why was this done? “The RBI wanted to reduce the time taken by banks to pass on the benefits of rate cuts to borrowers. Banks were seen to be reluctant to cut rates, which meant that customers continued to repay loans at higher rates. Therefore, the RBI devised the MCLR system under which rates are revised more frequently and the benefits of any cut are passed to customers immediately,” says Adhil Shetty, CEO, BankBazaar.
While talking to Magicbricks, State Bank of India, Chief General Manager, MG Vaijinath pointed out the key points that consumers should adopt to get into the MCLR system.
Customers who have taken loan before April 1, 2016 does not have to do anything. The bank they are affiliated to will automatically reset the link. Those who have not opted for Base Rate, they need to decide whether or not to link their accounts to MCLR. If a customer decides to the former, then a simple handwritten consent letter needs to be submitted to the bank.
For the first year, SBI will not migrate the new customers and therefore they will continue to pay 9.5% under Base Rate. On completion of a year, the reduction rate amount can be enjoyed by the customer from the bank without paying anything extra.
Those who want to stay in the 11% rate, the bank will issue a new home loan. This is because every loan under the Base Rate when given to the client was decided on the basis of higher rate. The bank would now migrate the client to lower base rate which translates to refinancing.
Earlier the rate was 5% of the loan without any ceiling but now it has been reduced to Rs 25,000 for loans up to Rs 3 lakh.
If you take an MCLR-linked loan, the interest rate that you pay will be subject to changes at fixed intervals, as per the tenure for which rates are linked.
Banks also charge a premium over the MCLR rate for the particular loan instrument linked to it. For example, a bank may have one year MCLR at nine percent, but it may charge a higher rate, say, 9.20 percent or 9.40 percent, keeping a 0.20 percent or 0.40 percent margin over the base MCLR rate.
If you are an existing borrower servicing a loan based on the base rate system, you are allowed to switch to the MCLR system without any additional charge. But a switch from your existing bank to another can involve charges like processing fee and administrative charges.
By Zee Media Bureau | Thursday, January 12, 2017 – 11:14 | ZeeNews.India.com
New Delhi: State-run Bank of Baroda recently reduced home loan rates by 70 basis points to the industry’s lowest level of 8.35 percent that will be applicable for customers having a strong Cibil scores.
BoB has reduced its marginal cost of fund based lending rates (MCLR) by 55-75 basis points across all tenors.
The highest home loan rate would be at 9.35 percent. The new rates would be applicable to all loans sanctioned with effective from January 7.
For the scores the bank will initially rely on credit scores of Credit Information Bureau of India (CIBIL)
The home loan rate is linked to their Cibil scores. A customer with a Cibil score of 760 and above will be offered the lowest rate of 8.35 percent.
Your Cibil score is decided by the factors of discipline that you maintain in repaying your existing loans.
If your credit score improves, you will have to pay less EMI, and the other way around.
Considering that you have a good Cibil score and you pay the lowest interest of 8.35 percent then on a home loan of Rs 50 lakh, it will translate into a saving Rs 2,496 a month and around Rs 9 lakh for a 30-year loan.
For the first-time borrowers, who don’t have any credit history with any credit information bureau, they will be charged 8.85% interest.
Source : https://goo.gl/bPCTD3
When banks cut MCLR, they usually do it for all the five MCLR baskets
Vivina Vishwanathan | Tue, Oct 11 2016. 04 35 PM IST | LiveMint
After the Reserve Bank of India cut repo rate by 25 basis points (bps), some banks such as Indian Bank and Canara Bank Ltd cut their marginal cost of funds based lending rate (MCLR) and their base rate. State Bank of India Ltd (SBI), the country’s largest lender, had cut its MCLR before the monetary policy announcement. MCLR is the new benchmark lending rate at which banks lend to new borrowers. The existing borrowers are still on base rate and have the option to switch to MCLR. Currently, MCLR is 5-10 bps lower than base rate. One basis point is one-hundredth of a percentage point.
When banks cut MCLR, they usually do it for all the five MCLR baskets. For instance, when ICICI Bank reduced its MCLR by 5 bps, its overnight MCLR and 1-month MCLR came down to 8.85% each, the 3-month MCLR to 8.95%, 6-month MCLR to 9.00% and 1-year MCLR to 9.05%.
Out of the five MCLRs that banks publish on their websites, it is either the 6-month or the 1-year MCLR that is used as the benchmark rate for new home loan borrowers. For instance, SBI has benchmarked its home loan to 1-year MCLR, whereas Kotak Mahindra Bank Ltd has linked it to 6-month MCLR. Kotak Mahindra Bank’s 6-month MCLR is 9.20% and SBI’s 1-year MCLR is 9.05%. This also means there will be a reset clause in the loan document, which is linked to the tenure of the MCLR your home loan is linked to. In case of SBI it will be 1-year and for Kotak Mahindra Bank it will be 6 months.
Things to remember
All MCLR-linked loans come with a spread, which is the margin that you have to pay above the MCLR. For instance, ICICI Bank offers 1-year MCLR at 9.05%. For a home loan of up to Rs5 crore, the spread is 25 bps, which means your home loan interest rate will be 9.30%. For home loans above Rs5 crore, the spread is 50 bps above the 1-year MCLR.
Usually the spread is higher for larger loans.
Some of the important factors that you must take into account if you are thinking of buying a house after 50 years of age by taking a bank loan.
By: Naveen Kukreja | Updated: May 13, 2016 10:31 AM | Indian Express
Rakesh Kumar, a railway employee in his mid-50s, never had to worry about buying a house. He had a transferable job and hence, his employer took care of his accommodation. Now that he was nearing his retirement, it was important for him to buy a flat. To his surprise, his loan application was rejected by several banks on the grounds that the majority of his loan tenure would fall in his post-retirement life.
Most of us tend to save for the down payment of a home loan after taking care of other financial goals such as children’s education and marriage. However, most people don’t take into consideration the fact that bankers may hesitate to approve loans once we cross 50, owing to our limited source of income.
Here are some of the important factors that you must take into account if you are thinking of buying a house after 50 years of age by taking a bank loan.
Your income is one of the most important criteria to judge your loan application. The possibility of loan approval increases if your pension is large enough to accommodate home loan EMIs. Usually, lenders prefer EMIs to be less than 40–50% of your monthly income. Also, EMI outgo on any existing loans will be subtracted from the total income while evaluating your loan repayment capacity. Consider including your spouse or working children as co-applicants of loan if your pension is not large enough to support EMIs.
Your credit score plays an important role in your loan approval process. A lower credit score can dampen your chance for securing a loan. Avoid applying for loans with too many lenders at the same time; this may reflect negatively in your credit score.
You can offset the disadvantage of your age by using your existing investments as collaterals for your home loan. Investments made in bank fixed deposits, mutual funds, NSC, KVP etc improve your loan eligibility, as the lender will have something to fall back on in case you fail to pay back the loan.
This is the amount that you will shell out of your own pocket to avail the home loan. Usually, lenders require you to pay 10–25% of your property value as down payment. They also consider age and repayment capacity to fix the down payment amount. Opt for a higher down payment, depending on your affordability. This may result in lower EMIs.
Type of loan
Based on the interest rate, there are two types of home loans — floating and fixed-rate. The interest rate for fixed-rate home loans remains the same during the entire tenure of a loan, while the interest rate for floating-rate loans varies according to the MCLR set by the bank. Although the floating-rate home loans work in your favour in case of a declining interest rate regime, the reverse is true during a rising interest rate regime. Some lenders have come up with a mixed variant where the interest rate is fixed for a predetermined period, following which it becomes a floating one.
As your income in your post-retirement life will remain somewhat fixed, an increase in EMIs due to an increase in interest rate may adversely affect your monthly budget. Therefore, opt for a fixed-rate loan to ensure a certainty in your cash outflow in your post-retirement life.
Generally, the tenure of home loans can be as high as 30 years. However, as lenders expect borrowers to complete the loan repayment before reaching 65-70 years of age, you may not be able to avail such lengthy tenures. Opt for a loan with a short tenure to reduce your interest payout. However, keep your cash flows in mind as a short-tenure loan will result in higher EMIs.
This penalty is levied when you pay the entire outstanding loan balance or a part of it before the completion of your loan tenure. However, this penalty is only applicable in case of fixed-rate home loans. Opt for prepayment of home loans (if your finances permit) as it results in reduced interest cost as well as a reduced EMI/loan tenure. However, do not use your retirement savings to prepay your home loans.
To sum it up, your monthly income, credit score, post-retirement income in the form of pension or annuities, and existing investments or properties will play a major role during the loan approval process. The other factors discussed will help you to bring down the interest cost of your loan and optimise your cash flows in your post-retirement life.
The writer is CEO & co-founder, Paisabazaar.com