Banks score on rates, HFCs on amount

While HFCs rates can be sticker, the higher LTV allows flexibility

Bringing 20% of a property cost to the table may not always be easy for a home loan borrower. Then, there is an additional cost of stamp duty and house registration, which can easily be around Rs 3 lakh for a house costing Rs 50 lakh in Mumbai.

With stamp duty and registration costs being around 6-8% all over the country, housing finance companies (HFC) or non-banking financial institutions (NBFC) seem like a better deal in comparison to banks.

In 2012, the Reserve Bank of India asked banks to exclude documentation and stamp duty while giving loans to home loan borrowers. So for loans up to Rs 20 lakh, banks can provide up to 90% of the house cost. For loans above Rs 20 lakh and up to Rs 75 lakh, banks can lend up to 80%. For, loans above Rs 75 lakh it is 75% of the house cost excluding these charges.

In other words, buyers have to bring in a good 20-30% of the total value of the house. While HFCs and NBFCs can add stamp duty and registration amounts, there rates are marginally higher. “We are allowed to provide the stamp duty and registration cost cushion in the LTV,” says a senior official of a non-banking finance company (NBFC).

“Our customer base is those who aren’t getting a home loan from banks or who need a higher amount. Given they are risky customers, we charge a higher fee. Our customers are ready to pay a higher price for whatever reasons,” he reasons.

Adhil Shetty of BankBazaar.com says there isn't much of a difference between the rates offered by banks vis-a-vis HFCs. Typically, the rate differential is between 0.15 to 0.25%. For a 20-year Rs 50 lakh loan, the equated monthly instalment (EMI) for State Bank of India BI (10.15) and HDFC (10.25) would Rs 48, 749 and Rs 49,082 or just Rs 333. Over 240 months (20 years), this means an additional Rs 79, 920 – not too high.

If you go to a bank, you will have to pay another Rs 3 lakh as registration and stamp duty. If you were to take Rs 53 lakh from an HFC/NBFC, the EMI would be Rs 52,027. That is, Rs 3,278 more per month or Rs 7.87 lakh more over 20 years.

 
However, if you invested the same Rs 3 lakh in a fixed deposit paying 9% annually, the returns after 20 years would Rs 16.8 lakh and interest income of Rs 13.8 lakh. In other words, the interest income is almost double than that of the amount paid. And there are many products like tax-free bonds where one can invest. This money, invested in equities, will give even a higher tax-free returns.

“Customers see the convenience also, that is, they are more likely to approach the financial institution that has pre-approved a project. Or, an institution with whom they have a long standing relation. Then the loan processing gets faster,” Shetty adds.

Then how do you decide? “If you are a priority sector borrower (loan amount = Rs 25 lakh or less) you will get similar rate from all institutions.”

 Ideally, if you are young and are short of cash, it’s best to go for a HFC/NBFC. On the other hand, if you are close to retirement, try and pay up the amount upfront because it will mean lesser pressure on the finances in the future.