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To simplify the process of selecting the home loan lender, sources provides a guide to some basic differences between banks and housing finance companies.

As a buyer planning to purchase a house soon, surely this question must be bothering you too. The answer is simple – there is no such thing as the best lender in the market. Every lender has its positives and negatives; otherwise there would have been only two to three players in the market. A loan seeker needs to explore the market to find the lender that suits his income profile and loan requirement at a reasonable cost.

Lenders are broadly classified as banks (nationalised and private banks) and nonbanking financial companies (NBFCs). The NBFCs that are dedicated to housing sector finance are known as housing finance companies (HFCs) e.g. HDFC Ltd, LIC Housing Finance, Indiabulls Housing, Dewan Housing Finance, etc.
To simplify the process of selecting the home loan lender, some basic differences between banks and housing finance companies are highlighted below.

There are different regulators for banks and HFCs. The Reserve Bank of India (RBI) governs banks, whereas the National Housing Board (NHB) regulates HFCs. To some extent, both of them follow the same regulatory processes.

The administrative and eligibility process including processing fees, valuation of property to be mortgaged, KYC, credit history, documentation, etc., is generally the same for banks and HFCs. However, HFCs hold an edge over banks in the processing of loans as they are purely dedicated to finance in the housing sector and their focus and expertise lies in that field, whereas for the banks, it is one of the many offerings they provide to customers. Thus, HFCs normally process home loans much more speedily and efficiently, as compared to banks.

HFCs follow the prime lending rate (PLR) system to determine the interest rate to be offered to home loan customers. Till June 30, 2010, banks used to follow the same system, which was later replaced by a much more transparent base rate system. Many old borrowers of banks still continue to be on the PLR system. Banks cannot lend below the base rate to any borrower. If the interest rate drops in the market, the banks will be forced to drop their base rate if they want to be competitive and retain their customer base. Hence, any reduction in the base rate will automatically benefit all home loan customers who are on the base rate system. This system has to be reviewed at least once every quarter, while this compulsion does not exist for the HFCs.

The interest rate is calculated as certain basis points or percentage above the base rate for banks and certain basis points below the PLR for HFCs. This difference is popularly known as spread. Often, it has been observed in the past that whenever there is a drop in the interest rate in the market, banks prefer to reduce the spread and keep the base rate the same to get new customers. Hence, the old customers do not derive any benefits of a falling market. Therefore, a loan seeker should ideally consider the spread (preferably lowest or nil) along with the base rate, if he wants to get the benefit of a lower interest rate and remain on par with new customers.

Currently, neither banks nor HFCs can charge any penalty for prepayment/foreclosure/balance transfer of loans if the loan is on floating rate of interest. They are free to charge a penalty if it is a fixed rate loan or a dual rate loan when they are in the fixed rate stage of the loan. As per the NHB guidelines, the HFCs cannot charge prepayment charges on fixed rate loans if the loan is repaid from own sources. Though there is not much difference between banks and HFCs in terms of the interest rate or processing of loan, customers prefer banks because of their existing association with the bank, its popularity and penetration. The smaller size of HFCs as compared to banks, remains their major drawback.

Whether you opt for a bank or HFC, make sure that you check the history of the lender in passing on the benefits of reduction in home loan interest rate to the existing home loan customer. This is important as you too will become their existing customer once you sign up with them; your benefits should also be on par with new customers.


Category : Flatons Advisors Blog



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