What is best for a home loan

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In recent weeks, major financial institutions – State Bank of India (SBI), HDFC Bank, ICICI Bank, Bajaj Finance and HDFC Ltd – raised deposit rates, signaling a tightening of the interest rate regime.

As financial institutions drag their feet to raise loan rates, it’s time for customers to choose between a bank and a housing finance company (HFC) before taking out loans for their dream home.

Real estate loans: Bank vs HFC

The Post Reserve Bank of India (RBI) guidelines as of October 2019, floating rate bank real estate loans should be linked to an external benchmark such as the reverse repo rate. The aim of the new lending regime was to ensure that the benefits of lower interest rates were passed on to borrowers. In other words, mortgage borrowers from banks would see changes in their applicable loan interest rate with the movement of the repo rate (at which the RBI lends money to banks and financial institutions) . the rates are indexed to their prime rates (PLRs) which are tied to their own cost of funds.

Banks set mortgage rates by charging a mark-up on the repo rate while HFCs offer loans after giving discounts on their PLRs. For example: if a customer chooses to take out a mortgage of ??50 lakh for 20 years with a large nationalized bank, it can obtain it at 6.7% (4% of the repo rate + 2.70% of the margin invoiced by the bank). In the event that she prefers to take out the same loan amount with the same tenure with a large HFC, she may end up agreeing to an interest rate of 6.70% (16.05% of the PLR – 9.35% discount). The bank and the HFC offer a similar interest rate at the entry level. However, there is a strong possibility that the customer will end up paying more to the HFC, compared to the bank, over a period of time simply because the pass-through of profit resulting from changes in the RBI’s key rate will be greater for loans taken from the RBI. of banks. At least that’s what we’ve seen in recent years.

Comparison of the transmission of interest rates:

Month

PLR for HFC

MCLR for the Bank

November 17

4:15 p.m.

7.95

November 18

16.75

8.50

November 19

16.85

8.00

November 20

16.40

7.00

21 November

16.05

7.00

Suppose client A has taken out a mortgage for ??50 lakh for 20 years of a large 9% HFC in November 2017. This HFC offered him the interest of 9% while its PLR was 16.15%. This meant that HFC was offering a 7.15% discount from its PLR of 16.15%.

Another client B took out the same loan amount with the same mandate from a large bank at the same 9% interest that the bank charged him a 1.05% mark-up on his 7.95% MCLR.

Both agreed to pay a NDE of Rs. 44,986.30

Impact on occupancy time

Month

HFC

Bank

November 17

240

240

November 18

258

255

November 19

252

221

November 20

220

182

21 November

197

170

Referring to the table above, it shows that bank customers benefited much more than their peers who benefited from HFC loans. Indeed, bank loans are linked to external references. Four years after taking a loan from a bank, client B saves 27 IMEs (amounting to at ??12.14 lakh) in relation to client A who had taken a next to a HFC.

Since a home loan is a long-term commitment, borrowers must make an informed decision when selecting a lender.

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