That brings us to the million dollar question; how do you make that choice? Clearly, there are some merits and demerits in each of these modes of home finance. How to decide whether you should take a home loan from a private bank, PSB, large HFC or NBFC? Here is a quick guide on how you can go about making a choice for your home loan.
Focus on the effective cost of the home loan
The first aspect, of course, is the rate of interest charged. But, the focus must be on the effective cost and not just the interest rate charged. Here, you must not only look at the funding costs but also the hidden costs like pre-payment charges, processing fees, etc. Another important aspect is how often the loan rates get reset because the rates in India have been trending lower for quite some time. With the recent RBI regulations on speedy transmission of rate cuts, most banks are forced to seamlessly pass on rate cuts to the customer based on an external benchmark.
Unlike banks, the NBFCs are not subjected to the same level of regulation, and hence, may not pass on rate cuts seamlessly. Also, since their cost of funds is higher than banks, they would have a higher cost loaded into the loans. That is because, unlike banks, NBFCs link their rates to a prime lending rate and not to an external benchmark as banks are required to do. Hence the rates charged by NBFCs may be a tad more rigid.
Is the convenience and service quality of a high standard?
This is an intangible aspect but then you can always make out good service when you see it. It is that simple! Normally, home loans have an average life term ranging from 15-25 years, so it is a very long term relationship. Hence the quality of relationship matters a lot. While some of the PSU banks may still be staid in their approach, private banks and NBFCs are going out of the way to offer digital empowerment tools and solutions to customers.
You must also look for 24x7 supports, real time access to the loan account via call centres and internet as well as making interest certificates available. Many NBFCs have been known to offer a better quality of service to home loan customers compared to banks. Also, in most of these cases, the services offered by NBFCs are more customized to the local tastes and preferences.
Bank eligibility norms tend to be more stringent
You will normally find that banks take a longer time to approve loans as compared to NBFCs and HFCs. That is because the RBI regulations and the audit trail are a lot more stringent. Apart from looking for the lowest rates, you must also look for speed of delivery. Quite often, banks may also insist on a third-party guarantee as a safety net and that can be quite tough to manage if the loan amount is large. Most NBFCs and HFCs don’t insist on personal guarantee and are OK with the mortgage of property as security. In the case of banks, the processing time is longer and disbursal also takes more time. You must factor that too, especially if you are keen to close out your property purchase quickly.
What is the margin that the lender insists on?
Normally, the lender gives loan only up to 85% of the value of the property as a measure of safety and to ensure owner equity in the project. However, there are methods like taking loan on the overall cost including stamp duty / registration or arranging a separate loan for the interiors and enhancements. These are matters of flexibility and NBFCs tend to be more accommodative on this front. Here one guiding principle should be that you must always try to put in the maximum margin you can afford and only take funding for the balance.
The most important decision in a home loan is not whether you take it from a bank or a NBFC. The decision is based on whether you are able to keep the home equity higher than your outstanding loan principal. That is when the home really adds value to you as an investment, apart from being an emotional anchor for your family.