Know your lender

If you need a home loan, you would generally approach a bank or NBFC or housing finance corporations. With lending rates going downwards in the last two years, many people are looking at owning a house. The introduction of RERA, additional tax benefits for first-time home owners, and interest rate subsidies under the Pradhan Mantri AwasYojana have further boosted the consumer sentiment

While opting for a lender, people typically look for lower interest rate. They, however, either ignore other key differences or would be unaware of them. At a time like this, when many must be planning to buy their dream house, let’s compare theirvarious loan options.

Different regulators
All three classes of lenders are governed by different regulators. While banks are created under the Banking Companies Act, they are governed by the Reserve Bank of India. NBFCs are incorporated under the Companies Act. Housing finance corporations on the other hand are regulated by the National Housing Board.

Loan to value ratio
The cost of property purchase is often increased by several associated expenses such as stamp duty, registration, payments towards brokerage, repairs, etc. The registration cost alone could range between three per cent and 11 per cent of the property value, depending on where you live in India. A typical bank loan may be able to fund only 80 per cent of the property cost, while the remaining 20-30 per cent of the total expense would have to be contributed by the buyer. NBFCs and HFCs, however, may be able to provide a bigger loan based on a larger property valuation, which allows the buyer to receive a larger loan that may cover costs such as registration and stamp duty.

Credit scores
Every lending institution will look at a loan applicant’s credit score to understand his creditworthiness. The credit score, which is typically expressed as a number ranging between 300 and 900, is an indicator of a person’s ability to repay his debts in a timely manner. We are seeing many lending institutions reserve their best interest rates for customers with credit scores of 750 or more. Customers with lower scores may have to pay higher interest rates. NBFCs and HFCs have a more relaxed approach towards credit scores. They too, like banks, will offer their best rates to customers with high scores. But they will also make loan offerings for customers with lower scores. A loan seeker with a low score may always start off with an NBFC or an HFC. Through timely repayment of this loan, he can improve his credit score, and then transfer his low to a bank where he’s likely to receive a lower interest rate.

MCLR vs PLR
All floating interest bank loans since April 1, 2016, are now linked to the Marginal Cost of Fund-based Lending Rate (MCLR). In the past, banks were seen as slow in passing on RBI-mandated interest rate cuts to customers. This prompted RBI to introduce the MCLR regime. In an MCLR-linked loan, your interest rate automatically switches at fixed intervals(such as in six months or a year) mentioned in your loan agreement. Therefore, you would not be left wondering when you would receive your rate cuts. In a falling interest rate scenario, you stand to benefit from such an arrangement. Loans from NBFCs and HFCs, on the other hand, are not linked to the MCLR. They are linked to the Prime Lending Rate, which is not under the purview of the RBI. Banks can’t lend below the MCLR. But NBFCs and HFCs may adjust their PLR as per their selling needs. This can turn out to be beneficial for customers who don’t meet the eligibility criteria of bank loans.

Overdraft facility
Since home loans involve a large amount and are long-term commitments, borrowers often try to reduce the interest outgo by making principal pre-payment. There are banks that offer an overdraft facility on loans. This allows customers to park excess funds in the loan account. Anything in surplus over the EMI is treated as pre-payment towards the home loan. However, the customer is also free to reclaim the same amount. NBFCs and HFCs do not provide an OD facility. As such, an OD loan may be useful to people who have frequent, short-term cash requirements — such as entrepreneurs.

Paperwork & processing
Banks have stringent norms about property paperwork. They are less likely to finance properties whose papers are not in order. You shouldn’t look at this as an impediment because a stringent paperwork policy helps you ascertain the legality of a property, on which you’re going to spend a substantial amount of money. NBFCs and HFCs, on the other hand, have more lenient paperwork policies, and they are also known to process applications faster.

The writer is the CEO of BankBazaar.com