Traditional Banks vs HFC for Home Loans: Know the Difference

A large number of people are unaware that apart from traditional banks, Housing Finance Companies i.e. HFCs also offer home loans. However, if you have both options, which is better?

It is worth noting that commercial banks are regulated by the Reserve Bank of India (RBI). On the other hand, HFCs are specialized NBFCs that are regulated by the National Housing Bank (NHB). In being able to lend money to borrowers, they have to procure a certificate of registration from the NHB. Thus, home loans offered by both institutions might seem similar on the surface, but the loans have distinct features because of the differences in the regulatory environment and fund sources.

What’s HFC?

An HFC is a Non-Banking Finance Company (NBFC) that offers home loans just like traditional banks. However, the difference between an NBFC and HFC is that the latter deals in home loans only.

HFCs usually offer a variety of real estate loans such as home loans, loans against property, plot loans, etc.

The following are some of the most important differences between a bank and an HFC:

• Banks are regulated by the Reserve Bank of India or RBI while HFCs are regulated by the National Housing Bank or NHB.
• The loan sanctioning process is usually more tedious with banks in comparison to the HFCs. The latter usually has fewer paperwork requirements and fewer formalities.
• Most banks only consider the value of the property for the loan. However, HFCs also often add registration costs and stamp duty to the home value.
• When it comes to interest rates, the HFCs follow a Benchmark Prime Lending Rate (BPLR)’ model in which they adjust the interest rate based on their average cost of funds. Banks, on the other hand, offer interest rates based on the Bank Base Rate plus a margin.
• In comparison to the traditional banks, HFCs can be slow in offering the benefit of interest rate cuts to their borrowers.

What’s Better?

It’s not easy to say which of the two i.e. HFC and Bank is better for a home loan because both have their advantages and disadvantages. For instance, if you want to enjoy the best interest rates, then a bank could be a good option. Similarly, if you want the funds on an urgent basis, then an HFC could be better suited for that requirement. Either way, it’s best to do your homework and compare quotes, etc. before making the final decision.

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