Introduction of Home Loans:
The prices of real estate in India are escalated tremendously. In order to fulfil the dream of having a small home, normally people prefer to apply for a loan. It is a financial assistance provided by the lender to purchase property which can either be for commercial use or for personal use on the condition that borrower agrees to mortgage the property to the lender. The borrower is required to repay a certain predetermined portion of the loan availed coupled with the interest, collectively known as Equated Monthly Instalment (EMI). Both the Principal amount and the interest thereon are certainly eligible for a tax deduction. In simple words, this is how the process of ‘Home Loan’ and monthly EMIs work.
Some of the types of Home loans inter alia include Home Construction Loan, Land Purchase Loan, Home Expansion Loan, Bridge Loan, NRI Home Loans, Home Improvement Loan, Joint Home Loan etc.
Introduction of Housing Finance Companies (HFCs)
A non-banking financial Company whose principal business is financing the acquisition house, the construction of houses, development plot of land for construction of new house.
The National Housing Bank (NHB) provides regulations to the Housing Finance Companies (HFCs). Any Non-Banking Finance Company (NBFC) becomes eligible to operate as HFC when it fulfils the requirement as specified under the Companies Act, 2013. Once the eligibility criteria is met, it must take necessary steps to get itself registered by adhering to necessary conditions specified under the Act.
HFCs aim to provide financial assistance to potential house owners. These are emerging as a good option to Banks and are gaining popularity among middle class and upper middle class sections in the society.
Getting a Home Loan from a Bank:
Banks not only offer mortgages but also various other types of loan products such as Car loans, Personal loans, Business loans and Gold loans etc. Floating rate bank home loan disbursed after October 2019 must be linked to an external benchmark like the repo rate by the Reserve Bank of India (RBI). So, if the repo rate is the basic benchmark of a home bank loan, borrowers will see rapid and equitable changes in their effective loan interest rates and changes in key policy rates. The main reason behind introducing a new loan regime was to allow for faster transfer of lower interest rates to lenders. However, they should also take into consideration that their average monthly instalments (EMIs) are likely to go up as and when the repo rate experiences an increase, that is to say, banks offer home loan products with a variety of EMI options, such as home loans with overuse space, home loans with up or down EMI payment options, flexible system of payments etc. Banks may take a longer amount of time required to process credit approval, unless same ones are previously approved by nature.
In order for the home loan to be granted, the borrower must fulfil complete a long list of eligibility criteria. If their credit score is not up to standard (read below 750), the bank is at the discretion to charge a higher interest rate. Also, cheap bank loan rates are usually allowed for female loan applicants or loan applicants with credit card payments.
Getting a Home Loan from HFCs:
HFCs are non-bank financing companies (NBFCs) that have a specialization in home loans. Their loan products are strictly reserved for home loans and joint ventures, more like allied instruments. Qualitative approaches to HFC lending may be more difficult than banks. They usually allow for flexibility while taking into consideration the criteria of income, points to the credit, requirement for margin money, payment period etc. of the aspiring borrower. The timing of loan adjustments with HFCs can be immediate and stress free as compared to banks.
However, Interest rates offered on the home loan by the HFCs are often pegged to their main lending rates that are, in most cases, found to be higher than the home loan rates offered by Banks. This situation has changed in recent times due to the significant decrease in the gap between the lowest interest rates offered by Banks and HFCs.
When it comes to processing fees and penalties, HFCs prove to be more expensive than banks. Since HFCs are inclined towards rates on their high lending rates unlike repo rate as in case of most of the banks, it can take a long time to transfer any discounted profits that have arisen due to declining repo rates to their lenders.
Liquidity Crisis in HFCs:
Housing Finance Companies (HFCs) that were facing a crisis last year have received huge incentives to pay off in order bring relief to the situation. In the first week of August, the National Housing Bank (NHB) announced granting of Rupees10000 crores in favour of HFCs. Later that month, Finance Minister Mrs. Nirmala Sitharaman announced additional funding for Rupees 20000 crores to HFCs by NHB, which increased the total installation of NHB to Rupees 30000 crores. All of this has passed and there are other funding schemes provided by the Government to the HFCs. Mr. Shishir Baijal, Chairman and Managing Director, Knight Frank India is of the opinion that the Government needs to monitor fund flow to revive realty Sector.
The continued decline in the real estate sector was exacerbated by the crisis for NBFC (a Non-Banking financial company) that first emerged after the IL&FS Debt Debacle. Although the impact of urgent consumer demand is evident in many industries now, the real estate sector has been facing the twin challenges of not too strong housing demand and the troubles on the supply side and both are in dire need of attention from the Government. Even though a series of measures, particularly in the area of affordable housing, have been developed, some well-defined supply chain plans, especially in the case of refunds facing HFCs, are much needed. Failure of assets by the whole system is always sufficient, but banks and NBFCs have abandoned mortgages as they have accumulated large NPAs (Non-performing Assets) due to suspended property projects and poor demand. Lack of trust in lending to suspended projects and construction can cause major problems. If the government monitors such a flow of funds to reach its goal, the sector will eventually recover. The progress will be gradual but positive results will eventually be seen.
Advantages of Availing Home Loans from Banks:
- Banks Transfer Fast Interest Rate Changes to Borrowers:
Banks are currently following the side costs of the RBI-controlled lending model (MCLR). However, as the RBI has made it mandatory for banks to link domestic loans with an external bank benchmark similar to the repo rate, soon any repo rate reduction will be passed on immediately to lenders.
- Overpayment/Overdraft facility:
A home loan is a long-term commitment and you must face high interest costs for years. For example, use Rupees 50 lakh home loan with an interest rate of 8.6 percent per annum over a period of 20 years. You will have no other option but to pay interest close to Rupees 55 lakh over the full term of the house loan, which is more than the principal and the loan. People who get a home loan often look to reduce interest rates by paying in advance. This is where over-the-counter banking assistance helps. With overdraft payments linked to a home loan borrower’s bank account, additional funds may be deposited into that account. This means that the surplus over EMI is treated as a prepayment of the home loan, which in turn reduces the total loan debt on interest payments. In fact, one can even give more when needed. While banks offer overdraft space to a home loan lender, the same is definitely not the case with HFCs.
- Loan Points and Interest Rate:
In order to approve a home loan, bank statements are very difficult. If the applicant does not have a strong credit history or low credit score, it is not easy to get a home loan from a bank. In terms of interest rates, the private sector banking rates are higher compared to public sector banks. If you want to borrow a home loan from a bank, you should always try to keep good credit points (over 750) as some banks have started offering low interest rates to those with high credit ratings and good credit history.
One should be aware that banks follow a complex documentation process, which means that they take longer to process a home loan application. If you have a low credit rating, you may not be able to get a home loan easily. Banks also offer lower interest rates than HFCs. Also, banks generally do not include stamp costs and registration costs while allowing loans for the value of the asset.
Advantages from Home Loans from HFCs
- Higher Lending Rate:
Compared to banks, while approving mortgage lending, HFC incorporates stamp costs and registration costs as part of local market estimates. For example, if the market value of a property is Rupees 50 Lakhs, the average cost of a stamp is 5 percent of the total local market value. The average registration cost is one percent of the market value. Therefore, the cost of stamp and registration costs amount to 6% of Rupees 3 lakhs than the total market value of Rupees 50 Lakhs.
HFCs include these additional Rupees of lakh as part of local market estimates. Therefore, if HFC approves 80 percent of the real estate market as a loan, the borrower will be able to get a higher loan amount as it can get 80 percent of Rupees 53 lakh, earning about Rupees 42.4 lakh. However, the bank will penalize 80 per cent for just Rupees 50 lakh, which is Rupees 40 lakh. Therefore, if you take out a home loan from HFC, you will be able to get a higher loan amount.
- Debt Relief:
Compared to banks, Housing Finance Companies (HFCs) are stronger when it comes to Credit score. According to experts, their high interest rates force them to be more open to loan applicants with lower debt rates. With HFCs, if you have less than 750 credit score, you may still have the opportunity to have your home loan approved but, at a higher interest rate. Borrowers, especially those from low income or illegal backgrounds, often have a strong credit history. If a borrower falls into this category and seeks a loan, HFC has set high standards or credit models to ensure their credit score as HFCs have established their own creditworthiness models they use and Credit Information Agencies rating to determine creditworthiness for the borrower.
- Simple Document Acquisition Process:
Compared to banks, documents are simple and turnaround time is much faster for HFCs. HFCs are at their discretion to offer flexible loan periods, processing fees and competitive interest rates to lenders. But the point to be noted here is that the interest rate offered by HFCs is generally higher compared to the interest rates offered by banks.
How can we help you in availing Home Loans?
We have, here with us, the team of expert professionals that is always there to guide our client who has chosen us. With the proper guidance, even tedious procedures like filling the application form, verification of documents, paying of nominal fees, the offer letter processing, legal check, valuation check, registration, signing and disbursement are carried out smoothly and in a hassle-free manner.
With over many years of experience and expertise in this field of work, we have built an excellent track record on the foundation customer satisfaction. Our team is very reliable and trustworthy. We are confident to serve and cater the needs of the potential borrowers after taking into consideration their convenience. We are open for any discussion with client who takes an effort to schedule an appointment with us.
Customer happiness is our motto and our customers can vouch for the same.
Please call us for any assistance, if needed. Your dream home awaits for you.