I guess the heading might be confusing for people as most think that home loans are offered only by banks. But the fact is Home Loans are offered by Banks and HFCs (Housing Finance companies). In this post we compare the both and investigate which one HFC or banks are better option for home loans?
What is HFC?
HFC are special NBFC (Non Banking Finance Company) which only deals in Real Estate Loans. This may be Home loan, Plot Loan, loan against property, Loan for commercial property, etc. HDFC is the biggest HFC followed by DHFL.
Difference between HFC and Banks?
For a home loan borrower it’s important to understand the difference between HFC and banks. We have summarized in the table below with detail explanation below the table:
1. Product Offering:
Banks deal with all kind of loans, deposits and other kind of products while HFCs only offer loans related to home, property, etc
Banks are regulated by RBI (Reserve bank of India) while HFCs are regulated by NHB (National Housing Bank). NHB is subsidiary of RBI.
3. Loan Sanction Process:
Normally it’s easier to get loan from HFCs as compared to banks
4. How Property is valued for loan?
After the directive from RBI in 2012, banks exclude cost of documentation, registration cost and stamp duty while calculating the total cost of the home. In case of HFCs, they add the above costs to the home value.
For e.g. if I buy a home worth Rs 50 lakhs in Gurgaon and pay Rs 3.5 lakhs of the home value as stamp duty and registration cost; banks would sanction maximum loan of 80% of 50 lakhs = 40 lakhs while HFC would sanction 80% of (50+3.5) lakhs = Rs 42.8 lakhs.
So borrowing from HFCs help in case you want higher loan amount provided you meet the income criteria.
5. Interest Rate Benchmark:
Interest rates on home loans is determined by Base rate of banks while its RPLR (Retail Prime Lending Rates) for HFCs. Base rate in case of bank is the minimum rate for lending by a bank i.e. banks cannot have loans interest rate lower than this.
For example the base rate for SBI is 9.85% and it’s home loan rate is 9.9% [9.85% (base rate) + 0.05% (Margin)].
HFCs determine interest rates by offering discount/spread on RPLR. For example HDFC which is HFC the present RPLR is 16.55%. The home loan interest for HDFC is 9.9% [16.55% (RPLR) – 6.65% (spread)].
The interest rates for customers can be changed by either altering RPLR for HFCs/ Base rates of banks or the spread. HFCs are at an advantage to change the spread as compared to banks.
How SBI & HDFC can deal differently on a rate cut?
Suppose in next few weeks there is another round of rate cut by RBI. SBI to lower its home loan interest rate has to lower its Base rates (which impacts all loans including home loan rates). This would benefit both the existing and new borrowers. However, HDFC to counter this move can just increase the spread from 6.65% to 7%. So this increase would lower the interest rates for new borrowers keeping the existing borrowers interest rates same.
This is a big arbitrage that HFCs exploit. In most cases the advantage of lower rates is not passed to existing borrowers by HFCs while banks have to pass on the rate cuts. In the long run and in most cases interest rates offered by banks are more transparent and lower than HFCs for existing borrowers.
6. Overdraft Option:
Banks like SBI offer Maxgain Home Loan which links a current account to the home loan account. The money kept in this linked account is subtracted from home loan balance amount to derive the interest for the month. This provides both liquidity to the borrower and also helps him save interest. HFC do not offer this facility.
7. Pre Payment of Home Loan:
It’s easier to pre pay in case of banks than HFCs. In case of banks like SBI, it allows you to can add loan account as payee and you can transfer money from any account to this loan account. The bank deducts the extra payment from principal, making it faster for customers to prepay. In case of most HFCs, you need to visit branch to submit cheques physically for pre payment. Though some HFCs offer online pre-payment but it’s not as easy as banks.
How to identify HFCs?
Did you know the home loan you borrowed from ICICI bank was not given by the bank but by ICICI Home Finance? Similarly PNB Home loans are offered by PNB Housing Finance Limited. So both in case of ICICI and PNB the home loans would follow the rules of HFCs.
Similarly for layman HDFC and HDFC Bank appear same but they are different companies and both are listed on stock exchanges. But all the home loan you take from HDFC bank is given by HDFC which is HFC.
Many other banks follow similar practice and it’s not easy for a layman to know if his home loan has been given by HFC or bank. So while borrowing you need to ask questions and scrutinize documents as they would obviously bear the name of entity financing your home loan.
SBI, IDBI Bank, Axis Bank are some of the big banks where home loans are offered by banks and not by their sister HFCs.
Banks are more transparent when it comes to interest rate changes and so in the long run they would turn out to be cheaper. Also they are more convenient as far as pre-payment of loan is concerned.
But in case you need more funds while purchasing the property, HFC turns out to be more beneficial as they can sanction higher loan amount by including stamp duty and registration costs. So weigh your option and choose wisely.
And then you can always switch your loan!