Home Loans: Time to look around for a cheaper loan

You could long-list your options, and then short-list them according to the highest value derived on these parameters.

The loan market is going through much change. From October 1, all floating-rate bank loans will be linked to an external benchmark likely to be the repo rate. Several public banks have followed State Bank of India’s (SBI) lead and launched loan products linked to the repo rate. Meanwhile, SBI has withdrawn its repo-linked home loan and is expected to relaunch it in October. But while it was available at an interest rate of 8.05% per annum in September, it was the cheapest home loan marketed in years.

This happened after RBI’s focused approach on ensuring better transmission of policy rate cuts to consumers so that loans become cheaper more quickly. With SBI’s repo-linked loan, we had seen an instant, 35 basis points cut in the loan rate following the central bank’s repo rate cut in August. So if you’re looking for a loan, whom do you approach? The banks, whose repo-linked loans are expected to be more responsive to policy rate cut transmissions, or NBFCs, that have their own set of lending criteria?

As a customer, look for the lender offering you the most value for your money and time. This means you should compare your options in terms of interest rates on offer, eligibility norms, loan-to-value provided, processing fees and documentation, and the quality of customer service. Go where you get optimum value on all these parameters, regardless of whether a bank is providing it or an NBFC. You could long-list your options, and then short-list them according to the highest value derived on these parameters.

Interest rates advertised

Currently, the lowest home loan interest rates from leading banks are in the range of 8.25-8.50%. In comparison, the lowest rates offered by leading NBFCs and HFCs start at a slightly higher 8.35%. Lenders normally reserve the lowest interest rates for women borrowers, or for loans up to Rs 30 lakh, and for those borrowers with the best credit profiles. For non-female borrowers, or loans above Rs 30 lakh, and borrowers with lower credit scores, the applicable interest rates will be higher.

Bank loans are benchmarked to the Marginal Costs of Funds-based Lending (MCLR) rate, but they will be benchmarked to the repo rate soon. Also, bank loan rates must mandatorily reset at fixed intervals. NBFCs, on the other hand, are not mandated to link to any external benchmark, and their loans are linked to the Prime Lending Rate, which they calibrate as per their business needs. And resets, too, may happen at the discretion of the lender rather than at assured intervals.

What can you save?

How does it help to pay 50 bps lower on your home loan interest? For a loan of Rs 30 lakh taken at 8.25% for 25 years, your EMIs are Rs 23,654, and your total interest is Rs 40.96 lakh. The same loan taken at a rate of 8.75% has an EMI of Rs 24,664 and a total interest of Rs 43.99 lakh. The scales increase for loans of larger sizes. Therefore, all other parameters considered equal, you should go with a bank loan because you may be able to get it a rate lower than that of an NBFC.

Going beyond interest

There’s much more to loan eligibility than just interest rates offered by banks and NBFCs. Credit score and loan-to-value can also swing a customer’s decision from one option to another. How much you’re able to borrow also matters greatly in high-value transactions such as a property purchase. A borrower would want the option to borrow more and bring down his own out-of-pocket spends. In this regard, NBFCs may be able to stretch their eligibility to allow a customer to borrow more.

If you’re an existing borrower, you should scan the loan market over the next few weeks. Look for offers that may allow you to switch from a high-interest loan to a low-interest one. This will help you to save a fortune over the full tenure of your loan.