Bank Home Loans with floating rates must now be tied to an external benchmark, such as the repo rate, under Reserve Bank of India (RBI) instructions that took effect in October 2019. Making ensuring that rate-cut advantages were passed through to borrowers was the goal of the new loan system. That is to say, if the repo rate fluctuated, bank customers who took out house loans would see variations in the applicable loan interest rate (at which the RBI lends money to banks and financial institutions). However, HFCs’ home loan interest rates are based on their prime lending rates (PLR), which are correlated with their own cost of funds.
Home loan rates are set by banks by adding a markup to the repo rate, whereas HFCs provide loans by offering reductions from their PLRs. For instance, a consumer may receive a house loan of 50 lakh rupees for 20 years from a big nationalised bank at a rate of 6.7% (4% of the repo rate plus the margin fee levied by the bank). She may settle on a rate of 6.70% (16.05% of PLR – 9.35% of discount) if she chooses to take out the same amount of loan from a sizable HFC for the same duration. The entry-level interest rate is comparable between the bank and the HFC.
Advantages of Choosing Bank
• Banks notify borrowers of changes in interest rates more quickly.
Banks are required to adhere to the RBI’s guidelines and use the margin cost of funds-based lending rate (MCLR). As a result, they are compelled to tie house loans to the marginal cost of all of their borrowings. Because of this, banks notify borrowers of interest rate changes more quickly than HFCs, whose rates are determined by the benchmark prime lending rate.
• Overdrawing Capability
In the event of excess finances, one such instrument that enables borrowers to promptly repay their loans is overdraft. A house loan typically entails a significant financial commitment, with interest payments that, by the time the loan is repaid, even exceed the principle sum. An overdraft facility reduces interest rates by treating the surplus in the borrower’s bank account as a prepayment for the mortgage. In the long run, this decreases the total loan obligation and dramatically cuts the interest payments. The borrower may also take out the surplus if needed. However, using HFCs prevents access to the aforementioned facilities.
Disadvantages of Choosing Bank
The bank’s documentation requirements are fairly strict, which may cause the processing of the application to take longer. Additionally, getting a house loan could be challenging for you if your credit score is poor. In these circumstances, a loan from HFCs could be a better choice.
Advantages of Choosing House Finance Company
- Increased Loan Amount
In general, banks are known to exclude stamp duty and registration fees when determining a property’s market value. With the HFCs, though, this is not the case. HFCs really have greater latitude in how they determine income, allowing you to obtain a larger loan amount than is typically available from banks.
- Relaxation of the Credit Score Requirements
HFCs are less strict about having a solid credit score than banks are. They are more willing to lend to consumers even with credit scores below 750 since they have greater interest rates than the former. To be aware of, HFCs have their own criteria to assess your creditworthiness, taking into consideration the real-world factors influencing your low credit score.
- Easy Documentation
The documentation process in case of HFCs is simpler as compared to the banks. Hence, the turnaround time to process the application is also quicker. So, just in case your documents are not in place, you might face hassles while approaching a bank for a home loan. However, HFCs are more flexible while sanctioning home loan applications.
Comparison of Interest Rate Transmission
| Month | PLR for HFC | MCLR for Bank |
| 17-Nov | 16.15 | 7.95 |
| 18-Nov | 16.75 | 8.5 |
| 19-Nov | 16.85 | 8 |
| 20-Nov | 16.4 | 7 |
| 21-Nov | 16.05 | 7 |
HCFs Vs Banks
| HFCs | Banks |
| When it comes to the size of the house loan, HFCs are more lenient. | Home loan interest rates are correlated with MCLR. |
| Regarding the borrower’s creditworthiness, HFCs are not overly strict. | In order to reduce the total amount of interest paid on the loan, banks frequently provide overdraft facilities. |
| Compared to banks, the paperwork procedure is easier. | very strict documentation procedures. |
| Comparatively speaking, interest rates are greater than banks. | Borrowers with poor credit are frequently turned away. |