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.