While leading banks and housing finance companies offer the same rates, the latter are allowed to include registration, stamp duty
Only a week after the Reserve Bank of India’s (RBI’s) credit policy, leading banks and housing finance companies (HFCs) have gone for a second round of interest rate cuts on housing loans. State Bank of India (SBI), ICICI Bank, HDFC, Indiabulls Housing Finance and Dewan Housing Finance brought down interest rates to 9.9 per cent for new customers. Axis Bank’s is marginally higher at 9.95 per cent.
Although this move brings the biggest lenders in the country at par with each other, taking a home loan from an HFC can make more sense for someone looking for higher funding. Banks, governed by RBI, are permitted to lend up to 80 per cent of the property value.
HFCs, regulated by National Housing Bank, take into consideration the stamp duty and registration cost while calculating the total cost of the property. In Maharashtra, where stamp duty and registration is around six per cent, this can be a significant amount.
Probably, that’s why HFCs have been gaining home loan market share over banks. “Today, the share of HFCs is 37-38 per cent. It used to be around 27 per cent a decade ago. The single product focus also helps, as it allows us to give better service,” says Ashwini Kumar Hooda, deputy managing director, Indiabulls Housing Finance.
Here’s how a home loan between banks and HFCs vary. If a borrower is opting for a property that costs Rs 50 lakh (Rs 5 milllion) and approaches a bank, the lender will give up to Rs 40 lakh (Rs 4 million). An HFC, on the other hand, will add the stamp duty and registration cost of around Rs 300,000 to the property value and can disburse a loan of up to Rs 42.4 lakh (Rs 4.24 million). This is six per cent more than what a bank would lend.
Of course, this will increase the borrower’s equated monthly instalment (EMI). If a person takes a loan of Rs 40 lakh for 20 years, at the current interest rates, the EMI works out to be Rs 38,336. If the loan amount increases to Rs 42.4 lakh, the difference will be Rs 2,300 a month. Over a 20-year period, the interest outgo will be higher by Rs 3,12,000. The difference will be higher as the loan value increases.
HFCs are best suited for someone who wants to borrow a higher amount of loan and wants to contribute less from his/her own pocket. If a person was to buy a Rs 50-lakh property and opt for a bank loan, his/her equity will be around Rs 13 lakh (including Rs 300,000 for stamp duty and registration). In case of HFCs, the outgo reduces by Rs 240,000 or 18.5 per cent.
Gaurav Khurana, founder and director of Dialabank, says HFCs are also flexible when it comes to evaluating business income, eligibility, and credit scores. “When it comes to service, banks are way ahead. Once you take a housing loan from banks and maintain a relationship, getting other loans and products get easier.”
Illustration: Uttam Ghosh/Rediff.com