Bank vs HFC The best bet

Q.Should I prefer banks or housing finance companies for housing loan? Satpal Bagga, Yamunanagar

Deciding between banks and Housing Finance Companies (HFCs) to obtain a housing loan can confuse potential homebuyers. Contrary to popular belief, HFC finance, including non-banking finance companies are not an unregulated entity. They operate under a license granted by the National Housing Board (NHB) and provide home loans in line with NHB guidelines.

On the other hand, banks are subject to regulation by the RBI. I will discuss the key factors to consider when choosing the right lender. Purchasing a home is a significant financial commitment for most individuals and securing the right housing loan is crucial to make this dream a reality. Choosing between a home loan from a bank or an HFC depends on various factors, including your financial profile, the loan amount required and your urgency for loan approval. Here are some considerations to help you decide:

Advantages of borrowing from banks

As per the RBI mandate, all banks in India (except co-operative banks) must follow the MCLR (Marginal Cost of funds-based Lending Rate) rule and must link home loans to it. If there is any change in the repo rates announced by the RBI, the banks would have to adjust the home loan interest rate. So, if there is a drop in the repo rate, you can benefit from lower interest rates on your home loan.

Another significant advantage of taking a bank loan to buy your dream home is that several banks have tie-ups with many leading real estate developers. This means if you purchase a property built by one of these developers, you may have a special deal on your home loan. This can significantly help you save money on your interest payments, or you may get the loan with more favourable terms and conditions to suit your profile.

Do HFCs have an edge?

• It depends on what you need. If you need a loan quickly or have a low credit score, HFCs might help you faster. Banks are good if you want lower interest rates.
• Most home loan borrowers prefer applying for a loan with lenders that have a simple application and approval process and the ones that offer online application facilities. This is exactly what HFCs offer. Also, HFCs have a minimal documentation process. This means you need not have to deal with complex paperwork to get the loan approved.
• You can get sanction for a higher loan amount as compared to banks. This is mainly because the HFCs include registration fees, stamp duty, and other related charges when they evaluate the value of the property you want to purchase.
• The most important drawbacks of borrowing a home loan from an HFC is that they charge a higher interest rate.

The documentation process of the bank is quite stringent and therefore, it might take longer time for the application to process. Moreover, if you have a low credit score, you may find it difficult to avail the home loan. In such cases, a loan from HFCs can be a better-suited option. The decision from whom to take home loan will also depend on location of the property as the HFC/bank may not be operating in those areas.

HFCs are more liberal in giving home loans to people who do not have adequate documents. So as far as the ease and availability of home loan is concerned, the HFCs are better option.

If you are a self-employed professional, the home loan securing process of a housing finance company will be simpler and quicker.

HFCs provide home loans and loans for housing-related needs to individuals and builders, filling gaps left unaddressed by traditional banks. They are crucial in propelling growth in India's housing sector by democratizing housing credit.

The borrower should carefully evaluate the actual loan requirements to make the right decision while selecting a lender.