Borrowers in big cities have to do everything in an expansive manner, even borrow big to attract bankers. If your home loan size is less than Rs 20-25 lakh, few bankers are willing to provide it.
The reason: It’s not a profitable venture. “From an institutional perspective, the cost of processing and maintaining and servicing, a small loan of below Rs 15-20 lakh is much higher, compared to loans of above Rs 50 lakh. Typically, the fixed cost on a loan for an institution is the same, irrespective of the loan value. Smaller the loan, higher the cost as a percentage of the loan value,” says Vipul Patel, of Home Loan Advisors, an independent mortgage advisory firm.
Let’s understand this with an example. When you borrow Rs 20 lakh, the bank charges 50 to 100 basis points or Rs 1,500 to Rs 2,000, whichever is higher, as administrative and processing fees. The fees are used by the bank or housing finance company to send executives or engineers to do a recee of the property. This is especially important if you are buying a second-hand property. Similarly, the entire documentation process, Cibil verification and storage of house documents have costs.
“In case of home loans, the bank has to maintain records for 10 to 15 years. So, if there are 10 loans, we have to maintain 10 different sets of documents. But, in the case of one big loan, we have to worry only about one set of documents,” says a banker.
If one is taking a small loan in a big city, there is a chance that the property is in a far-flung area, where the bank does not have a branch. Or, if the majority of the loan is being paid by the customer from his own pocket, it makes interest income quite low and chances of pre-paying the loan are significantly higher. In such circumstances, most banks are unwilling to take loans in the books.
In fact, according to banking sources, some private banks already have an unwritten code that no loans below a certain threshold would even be entertained. Public sector banks are a little more willing.The rejection may not happen overtly. But, banks are known to come up with innovative reasons for rejecting home loan applications.
In such circumstances, the customer has little choice. He could either borrow from relatives or take a personal loan from banks. The latter’s interest rate is significantly higher, at over 15 per cent. Even the tenures are shorter at seven-10 years.
But, there is a relief. They can aggressively repay and get rid of the loan quickly. Customers who are taking this personal loan only as a small component of the overall property cost might find this an attractive option. But, for the rest, buying a flat even in a far-flung area becomes very difficult.
