By Kavya Balaji | July 18, 2017 | Bank Bazaar
You have chosen your dream home and the project is approved by both banks and Housing Finance Companies (HFC). You need a Home Loan. Which lender should you go for? Are HFCs genuine? Are HFCs well regulated? Do they have fair loan practices? Will they provide standard services? All these questions might be playing in your mind. Here, we try to answer some of those questions for you.
Who supervises HFCs?
Unlike popular perception, HFCs are not unregulated. They are regulated by the National Housing Bank (NHB). HFCs need to register with NHB and the latter regulates and supervises them. There have been talks about the Reserve Bank of India (RBI) taking over but nothing is on the ground till now. However, NHB has been quite proactive in ensuring that Home Loan borrowers rest easy. These include steps like abolishing prepayment charges for floating rate loans, putting a cap on Loan To Value (LTV) ratio and making sure that HFCs have done proper provisioning for their bad loans. So, it is not right to say that HFCs are unregulated and are free to fix their own interest rates. They are well regulated and have standard industry practices when it comes to services.
What about their interest rates?
HFCs follow what is known as ‘Benchmark Prime Lending Rate (BPLR)’ model. They will fix an interest rate based on their average cost of funds. The loan rate that is fixed by HFCs will be at a discount to the BPLR.
There are two issues here. The BPLR is based on past cost of funds/interest rates and is not forward looking. Therefore, HFCs might be slow in passing on interest rate cuts to customers. Another point is that some of the HFCs might not be transparent with their BPLR.
Now, do banks offer better interest rates than HFCs? Sometimes, they do. This is because banks follow the Marginal Cost of Lending Rate (MCLR). Here, RBI ensures that the interest rate cuts made by the central bank are passed on to bank customers through the bank’s MCLR as quickly as possible.
However, note that there are HFCs that are competitive and do offer interest rates comparable to banks. Consider this: HDFC limited, one of the most popular HFCs, offers Home Loans starting at 8.5% while State Bank of India, the most popular bank, provides Home Loans that start at 8.65% unless you’re a woman. For women, SBI offers loans at 8.5%. HDFC has a standard loan process and the interest rates are transparent too.
So, HFC or bank?
You might think that at the end of the day, what matters is how quickly the firm/bank is able to pass on interest rate cuts as we are now on a downward interest rate cycle. Dies that mean you should choose a bank? Wrong!
Understand Home Loan is a long tenure loan. Most Home Loans stretch beyond 10 years. Given this scenario, when interest rates start increasing some years down the line, both banks and HFCs will pass on interest rate hikes quickly. Also, you might have to pay a heavy conversion fee for getting the lower rates now. Some HFCs actually charge a lower conversion fee than a bank.
Another important point that you need to understand is that interest rate cuts are passed on more quickly to new borrowers rather than existing ones. In case there are interest rate hikes, these will be passed on quickly to both new as well as old borrowers. So, passing on interest rates won’t matter as much in the long run. Then?
How expensive is that loan?
It doesn’t matter whether you take a loan from a HFC or a bank as long as you get competitive interest rates and terms. What would matter are the processing fees, prepayment fees and the foreclosure fees.
Typically Home Loans are taken by people in their 30s and are closed within 10 to 12 years. There are hardly a handful of people who let their Home Loan run till 20 years. This is because as people grow in their career, their salaries go up over a period of time and the EMIs seem smaller. So, they would rather repay the loan quickly then have a higher outgo in the form of interest. That is precisely why you need to check the prepayment and foreclosure fee. Heavy prepayment fees will mean an expensive loan. Same goes for foreclosure. There are several HFCs and banks that don’t charge fees for prepayment or foreclosure, even for a fixed rate loan. Consider this factor before zeroing in on a Home Loan provider. Some lenders have a waiting period before which you cannot prepay. Check this too, in case you want to use your yearly bonuses to prepay your Home Loan.
Most of the times, fixed rate loans become floating rate loans after a period of time. You have to go through the terms and conditions of the loan to see how interest rates might change. Another important point to note is whether a top up loan facility is available. Since a Home Loan is with collateral and the value of your home tends to go up over time, it is easy to get a top up loan on your Home Loan. They work out cheaper than Personal Loans. If your Home Loan provider is able to give you a top up loan on your Home Loan, it will be very useful if you need funds many years down the line.
So, there are multiple factors that you need to consider before choosing a Home Loan provider. Here’s a list:
- Interest rate offered
- Fixed or floating
- Processing fee
- Part-payment charges
- Foreclosure fee
- Conversion fee
- Top-up loan facility
- Service standards
Source : https://goo.gl/qf6Ypo
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.”
Indian Housing Finance Companies (HFCs) need to work on underwriting standards for affordable home loans to control credit risks, according to Moody’s
Abhijit Lele | Mumbai | July 26, 2016 Last Updated at 00:21 IST | Business Standard
Indian Housing Finance Companies (HFCs) need to work on underwriting standards for affordable home loans to control credit risks, according to Moody’s. The observation becomes crucial, at a time when the government is pushing for an increase in home ownership among underprivileged groups.
Affordable housing loans — which are mortgages for low-income earners — are typically opted for by first-time home buyers, usually self-employed in small unregistered enterprises or working for small companies. Key credit considerations for HFCs while giving such loans include income assessments.
Some HFCs prefer to extend loans to the specific building projects of construction firms that they have pre-approved, Moody’s said.
The affordable housing loan market is forecast to grow to Rs 8 lakh crore by 2022 from Rs 59,300 crore in March 2015, bolstered by government measures. Affordable housing loans accounted for 14 per cent of the total home loan books of HFCs as on 31 March 2015. “This segment presents unique credit risks for lenders, and when securitised, for residential mortgage-backed securities because of the nature of the borrowers,” said Georgina Lee, assistant vice-president at Moody’s.
Many borrowers do not have previous banking transaction records and, for the self-employed, they do not disclose their incomes or file tax returns.
As such, the formal documentation or records needed to verify income and the ability to service loans is absent, similar in some ways to “low-doc” mortgage loans in other jurisdictions.
Source : http://goo.gl/kknWaV