Housing Finance: Should you go to banks or NBFCs?
RBI rules restrict banks from approving entire loan amounts for a house. Is it better to get yourself a home loan from a non-banking financial institution (NBFC)?
Soaring interest rates have made buying property a herculean task. In cities like Mumbai, where the average house is priced between Rs25 lakh and Rs75 lakh, getting a bank loan is a difficult prospect.
Rules laid down by the Reserve Bank of India (RBI) allow banks to approve only a certain percentage of the total value of the home and not the full price.
|Value of the home||Loan amount|
|Up to Rs20 lakh||90%|
|Rs20 lakh – Rs75 lakh||80%|
|Above Rs75 lakh||75%|
Making a down payment (the amount a buyer initially needs to shell out of his/her own pocket) of 20-25% of the property’s price isn’t easy for anyone. It especially isn’t easy for a young first-time borrower.
Furthermore, in 2012, the RBI asked banks to exclude documentation charges and stamp duty while giving loans to home loan borrowers.
Stamp duty and the registration fee usually make up about 5%-8% of the sale price of the house. Typically the stamp duty and house registration fee for a flat in Mumbai valued at Rs1 crore amounts to about Rs5 lakh. Add this to the down payment of Rs 25 lakhs, and the buyer effectively ends up paying Rs30 lakh initially, which is 30% of the flat’s value.
On the other hand, loans given by housing finance companies (HFCs) or non-banking financial institutions (NBFCs), cover stamp duty and registration fees as well. This might make them seem like a better deal in comparison to banks. But their interest rates are marginally higher.
Often HFCs and NBFCs are very convenient because loans are processed faster, particularly if the financial institution has approved the project. Many residential projects even tie up with HFCs and NBFCs.
The higher interest rate is to hedge against risks associated with approving loans while considering fewer documents. Keep in mind that this is for loans that are over Rs25 lakh. For loans that are Rs25 lakh or less, which are classified as priority sector, there is no difference in rates.
The difference in interest rates usually ranges from 0.15% to 0.25%. Taking the example of a house worth Rs1 crore, your loan amount would be Rs75 lakh. If you applied for the loan from ICICI bank (with an interest rate of 10.25% p.a.), the equated monthly instalment (EMI) for 20 years would be Rs73,623. With HDFC (10.75% p.a.) your EMI would be Rs75,143 – an additional Rs1,520 every month. Over 240 instalments (a period of 20 years) it would mean an additional Rs3,64,800.
Over and above the sale value of Rs1 crore, you will need to shell out Rs5 lakh to Rs8 lakh for the registration fee and stamp duty. For calculation purpose let’s assume it is Rs5 lakh. If you avail the loan from a bank you’ll have to pay this money. However if you take a loan from an HFC or NBFC then you could add this amount to your loan.
Therefore, if you add Rs5 lakhs to the above example your loan amount from HDFC stands at Rs80 lakh. The EMI for this loan would be Rs81,219, which is an additional Rs6,076 every month. Over the tenure of the loan (20 years) you would end up paying nearly Rs14.5 lakh more.
HFCs and NBFCs are often the best bet for young first time investors or for buyers who don’t have sufficient savings, even though availing a loan from a bank is more financially prudent.
Note however, that most banks have their own EMI calculators. To know what rate of interest you might be offered on a home loan, check with your bank’s website.