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
State Bank of India (SBI) chairman Arundhati Bhattacharya has said that there should be a level-playing field between banks and housing finance companies (HFCs) over pegging interest rates below benchmark rates.
Mayur Shetty | TNN | 02 November 2015, 8:07 AM IST | ET Realty
MUMBAI: State Bank of India (SBI) chairman Arundhati Bhattacharya has said that there should be a level-playing field between banks and housing finance companies (HFCs) over pegging interest rates below benchmark rates.
According to RBI guidelines, bank loans are priced above the benchmark rate, which is the ‘base rate’. In the case of HFCs, the benchmark is their prime lending rate. However, HFCs face no restrictions on lending below their prime lending rates. As a result when rates change, banks have less freedom to re-price loans selectively compared to HFCs, which can vary the spreads over or below the benchmark to any extent.
“I don’t think there should be any regulatory arbitrage (between banks and HFCs). Regulatory arbitrage always makes for an uneven-playing field, and in any area that you are operating it is important to have a level-playing field so that the most efficient of them do the best job,” said Bhattacharya.
According to her, the regulator had spoken of the difference between cost of funds for banks and HFCs as the reason for the discrepancy. “The regulator says that they also have to get their resources at higher cost compared to what the banks pay. So there are pros and cons for everyone and, therefore, how do you create equity so that everyone has a level-playing field? It is difficult to opine on this,” she said.
Explaining her earlier demand for more flexibility in home loans, Bhattacharya said that the bank was not seeking introduction of teaser loans. Rather, it was keen on introducing step-up loans where EMIs rise after initial years. “I believe that there is a place for this. When people take a loan, they go right up to the top. But over time, repayment becomes easier as salaries go up and lifestyle changes to adjust to the instalments, and within two or three years the EMI does not hurt as much as it did in the initial years. Therefore, a variable EMI is something that makes repayment easier,” she said.
She added that there are also some borrowers who do not immediately shift into the house and have an additional burden of rental in the initial two-three years. “There are difficulties in the first two-three years, which we feel if there is a step-up EMI, then that definitely addresses stretched budgeting for first-time home loan borrowers,” she said. On a proposal by the National Housing Bank to reintroduce prepayment charges on floating rate loans if loans are prepaid in the first two years, Bhattacharya said, “In case of floating rate loans, The loans are anyway floating downwards. In that case, is there any case for a prepayment penalty? We have not put our mind to it.”
Source : http://goo.gl/AIQdzr
Brijesh Parnami | Posted at: Jan 12 2015 1:20AM | Tribune India
A home loan repayment, as we all know, is a major liability that often takes several years of your earning life. Sometimes, unforeseen circumstances such as a medical emergency in the family or a job layoff may turn out to be a heavy drain on your resources and may offset your calculations of repaying the loan in the scheduled phased manner. For a person who has a 10-year repaying timeline, a sudden layoff and downturn in the industry, may mean he or she may find it difficult to keep making the same repayment every month. Refinancing to a lower mortgage interest or a facility that enables you restructure your monthly instalments can come to your rescue in such situations.
It can also be to your advantage to refinance to a lower mortgage interest rate even when you are managing your finances well. This can enable you to invest in another lucrative venture or buy another property by sparing a greater monthly income at your disposal.
Qualifying for a lower interest rate on your home loan will save you money over the long haul. A lower rate of interest can also lower your monthly payments, which may help get you out of a financial bind if unexpected hardship strikes. If you find yourself falling behind in making your mortgage payments, being honest with your bank or financial institution may get you a lower interest rate without you having to refinance a new loan.
Often, in the absence of awareness about the facility of restructuring interest rates or lack of good advisors, people struggle with financial strains and continue to suffer hardships. Some, even default on their payments, or have to sell major assets to make ends meet.
All you need to do is gather your documents and speak to your bank. Most banks are ready to help create more congenial conditions that will allow you to pay back their loans successfully over the long run. As much as you do not desire to default on your payments, your bank too would be keen to ensure that the loan repayment is made smoothly.
Banks are also keen to make you stay with their services, rather than force you out to another lender.
Talk and negotiate with your bank
Speak to your bank executives and inquire about provisions to reduce your interest rate or make other adjustments to your loan terms as a way to decrease your monthly payment. Discuss your financial constraints and explain how you plan to go about the new repayment arrangements. Be prepared before entering into a discussion by making inquiries with other banks about current mortgage rates they are offering to individuals applying for home loans. This will help you be aware of the market rates and give you a negotiating handle.
Provide evidence of financial constraints
Meet your bank executives and provide them information and evidence about the financial problems you are facing lately. In case of a medical emergency, provide your medical bills to make evident the financial drain you are experiencing. Keep your documentation complete and write to the bank formally, if required with the request.
Not just proof of the additional financial burden, also keep ready the evidence of all your payments and expenses you incur every month vis-a-vis your monthly income to make your case. In case you have suffered a layoff or job loss, also provide proof of the same.
Check all options available
You bank may offer more than one restructuring offer after taking into account the problems being faced by you. If your bank is willing to modify the conditions of your loan, seek all details and terms of conditions in writing. Your lender might offer to lower your interest rate temporarily until you regain your financial abilities and catch up with your payments. Ask for all the conditions in writing at the time of negotiation.
Cite your payment history
If the borrower has a good repayment history, banks are more often than not willing to negotiate the terms of repayment when confronted with a financial situation. Cite your positive repayment history and if needed, also indicate to the bank that you might be willing to shift to another lender if the restructuring doesn’t work out here. In most cases, this will be enough to convince the bank to work out an alternative.
Be proactive about checking rates
Keeping yourself informed pays. Even if your finances are going all smooth, you should be proactive in keeping informed about the prevailing interest rates. Many banks continue to discriminate between old and new customers, charging the existing ones a higher rate than that being offered to new borrowers. If you are being charged a higher rate, ask your bank to convert it to the rate applicable to new borrowers. With the RBI abolishing the prepayment charges that were levied by banks, institutions or NBFCs, switching from one bank to another is not at all costlier now. It has boosted the spirit of the borrowers for going ahead with the negotiation discussion with their existing lenders.
The author is CEO, Destimoney Advisors. The views expressed in this article are his own
Source : http://goo.gl/8ZTetx