Here is how the Rates on Home Loans are Charged by the Banks and Housing Finance Companies
Jun 26, 2018 Home Loan
The National Housing Bank Limited (NHB) a subsidiary of RBI regulates the Housing financing companies (HFC) and is funded differently from those of banks. Hence the way interest rates charged on home loans granted by housing finance companies are also different from the banks. These housing finance companies base their actual lending rates against a benchmark rate known as Benchmark Prime Lending Rate (BPLR). With reference to this rate, the interest rates for all the loans are calculated. This rate is usually the highest rate that the housing finance company charges. A majority of the home loans are given at a rate that is below the PLR.
In the PLR regime, the borrowers were not able to know the bottom rate at which the HFC grants home loans. The basis of charging interest was not transparent. Also, these lenders do not change their PLR as frequently as those of the banks. In order to attract new customers, HFCs might give discounts on their PLR which might seem unfair to the existing customers who are locked in interest rates with lower discount. The existing customers would only get the benefit when the lender reduces its PLR.
Therefore the question arises whether the borrowers should take the loan from the bank or housing finance companies. If the borrowers have a good credit score, then it is always advised to take home loan from a bank. But then why do the borrowers go for housing finance companies. In many cases what happens is there remains some problem either with the property documents or income proofs or their credit score, so this carries a higher risk for the lender to give the loan, hence a higher interest rate is justified.
After PLR, from 2010, RBI introduced base rate regime that refers to the rate below which banks are not allowed to lend to the borrowers. This was done to bring transparency and to make sure that the banks quickly pass on the reduced repo rate to the customers. However, the first purpose was fulfilled as now the borrower could know exactly how much they need to pay for the premium. But the banks were not so prompt to pass on the benefits of reduced repo rates to the customers. Rather banks figured out new ways to calculate their base rates differently.
Therefore, MCLR regime was launched to ensure that the banks pass on the benefits of reduced repo rate to the consumers. The RBI made it compulsory for all the banks to link all the loans with the marginal cost of their borrowing for different tenures. The existing home loans that are taken under PLR and Base Rate regime are supposed to get continues under the respective regime till the loans are completely repaid or the loans are switched to MCLR. Also, the rate for the home loans would not change for each change in MCLR as the banks are allowed to reset period for a maximum of one year.
In the PLR regime, the borrowers were not able to know the bottom rate at which the HFC grants home loans. The basis of charging interest was not transparent. Also, these lenders do not change their PLR as frequently as those of the banks. In order to attract new customers, HFCs might give discounts on their PLR which might seem unfair to the existing customers who are locked in interest rates with lower discount. The existing customers would only get the benefit when the lender reduces its PLR.
Therefore the question arises whether the borrowers should take the loan from the bank or housing finance companies. If the borrowers have a good credit score, then it is always advised to take home loan from a bank. But then why do the borrowers go for housing finance companies. In many cases what happens is there remains some problem either with the property documents or income proofs or their credit score, so this carries a higher risk for the lender to give the loan, hence a higher interest rate is justified.
After PLR, from 2010, RBI introduced base rate regime that refers to the rate below which banks are not allowed to lend to the borrowers. This was done to bring transparency and to make sure that the banks quickly pass on the reduced repo rate to the customers. However, the first purpose was fulfilled as now the borrower could know exactly how much they need to pay for the premium. But the banks were not so prompt to pass on the benefits of reduced repo rates to the customers. Rather banks figured out new ways to calculate their base rates differently.
Therefore, MCLR regime was launched to ensure that the banks pass on the benefits of reduced repo rate to the consumers. The RBI made it compulsory for all the banks to link all the loans with the marginal cost of their borrowing for different tenures. The existing home loans that are taken under PLR and Base Rate regime are supposed to get continues under the respective regime till the loans are completely repaid or the loans are switched to MCLR. Also, the rate for the home loans would not change for each change in MCLR as the banks are allowed to reset period for a maximum of one year.
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