How to choose between bank, housing finance company

While the latter's rates can be stickier, the higher loan-to-value amount allows flexibility

Bringing 20 per cent of a property’s cost to the table isn’t normally easy for a home loan borrower. Then, there is an additional cost of stamp duty and house registration, easily around Rs 3 lakh for a house costing Rs 50 lakh in Mumbai.

With stamp duty and registration costs of six to eight per cent in the country, housing finance companies (HFC) or non-banking financial institutions (NBFC) seem 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 per cent of the house cost. For loans above Rs 20 lakh and up to Rs 75 lakh, they can lend up to 80 per cent. For, loans above Rs 75 lakh, it is 75 per cent of the house cost, excluding these charges.

In other words, buyers have to bring in a good 20-30 per cent of the total value of the house. While HFCs and NBFCs can add stamp duty and registration amounts, their rates are marginally higher. “Our customer base is those who aren’t getting a home loan from banks or who need a higher amount. As they are risky customers, we charge a higher fee. Our customers are ready to pay a higher price for whatever reasons,” a senior NBFC official 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 and 0.25 per cent. For a 20-year Rs 50 lakh loan, the equated monthly instalment (EMI) for State Bank of India (10.15 per cent) and HDFC (10.25 per cent) would Rs 48,749 and Rs 49,082 or only 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 a month or Rs 7.87 lakh more over 20 years.

However, if you invested the same Rs 3 lakh in a fixed deposit paying nine per cent 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 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 return.     “Customers also see the convenience. They are more likely to approach the financial institution that has pre-approved a project. Or, an institution with which 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 a similar rate from all institutions.” Ideally, if you are young and short of cash, it’s best to go for a HFC/NBFC. If close to retirement, try and pay the amount upfront because it will mean lesser pressure on finances in the future.