How do banks and housing finance companies pay house loan rates

Will lenders opt for a property finance company or a bank?

Borrowers with good credit scores should, therefore, take advantage of banks ‘ home loans rather than HFCs. Real Estate in navi Mumbai then the question arises: Why are people turning to HFCs? In most cases, the borrowers have some problems with either the property documents or their proof of address, or a bad credit rating.

 

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img1: banks and housing finance

 

We are looking at how banks and housing finance firms get to the interest rate paid on home loans.

Although several repo rate cuts (the rate at which banks borrow from the central bank) was made by the Reserve Bank of India (RBI), lending rates have not witnessed a corresponding improvement.

Homebuyers are often eager to know why this occurs, and how banks and housing finance companies (HFCs) charge interest rates.

The article deals with how housing finance firms, as well as banks, have paid interest on home loans.

Basis of the interest rates for home loans charged by housing finance companies.

 

Benchmark Price for Prime Lending:

HFCs are governed by RBI’s affiliate, National Housing Bank Limited (NHB).

HFC funding is different from that of banks. Underconstruction Projects in navi mumbai the justification for charging interest on home loans issued by HFCs, therefore, is entirely different from that followed by the banks.

These firms base their actual loan rates on an internal benchmark rate, called the Benchmark Prime Lending Rate (BPLR). The interest rates are calculated with reference to this rate for all loans.

In particular, the BPLR is the highest rate charged by the HFC. Therefore, most home loans are issued at a rate that is below this PLR.

 

Drawbacks of the PLR regime:

Since no borrower knows the lowest rate the best customer receives, this is a nontransparent basis. In fact, these borrowers don’t normally change their PLR as often as the banks change their rates. The HFCs give them greater discounts on their PLR in order to attract and acquire new customers, which may seem unfair to the existing customers, who are locked in at higher rates.

 

Benchmark Price for Prime Lending

img2: Take advantage of banks

 

The PLR system and the base rate:

Previously, banks used to lend on the same basis, followed by HFCs – the PLR, for example.

The base rate is a rate below which the banks, even to the best of lenders, are not permitted to lend.

The aim of introducing the concept of the base rate was to provide clarity in lending and to ensure that banks pass on the repo rate cuts to customers faster than what was happening under the PLR regime. 1 bhk flat in kharghar the first purpose was served since the base rate served as the lowest. Therefore, a borrower knew exactly what premium he charged over the best of customers, who could get the home loan at the base rate.

 

Base rate scheme drawbacks:

Banks, however, weren’t quick to pass on the benefits of repo rate reductions.

Banks also invented ingenious ways of measuring their base rates differently and this was not clear.

The base rate should have been based on the cost of the bank’s assets.

However, as banks had portfolios of old deposits and borrowings with higher rates, this resulted in a very marginal decrease in their base rates whenever the RBI decreased their repo rate.

This was evident from the fact that while the RBI reduced the repo rate between January 2014 and October 2016 by 175 basis points, the banks reduced the base rate by only 50 basis points to 75 basis points, thus denying consumers the benefits of reducing the repo rate.

 

What is the policy on the MCLR?

The RBI made it mandatory for all banks to connect all loans to their marginal borrowing costs, for various tenures, faster than was actually the case.

With this, banks were meant to work out the marginal cost of fund-based lending rate (MCLR) for different tenures such as overnight, 1 month, 3 months, 6 months and 12 months.

This was contrary to the base rate used by the banks to lend for various tenures, without looking at the relevant tenure-based borrowing.

Under the MCLR, the interest rates for home loans did not change with every adjustment in the bank’s MCLR, as banks were permitted to have a fixed one-year reset period.

 

take advantages of banks

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External tariffs as benchmarks and repo house loans:

As this also failed to achieve the desired results, as of 1 October 2019, the RBI made it mandatory for all banks to benchmark all their loans against a rate not internally calculated but benchmarked against an external rate.

 

Now banks have the option of benchmarking their lending rates against any external benchmark such as:

1. RBI repo rate

2. Three-month return on Indian government treasury bills announced by Financial Benchmarks India Private Ltd (FBIL)

3. The Yield of six months on government treasury bills, as reported by FBIL and

4. Any other FBIL-published benchmark.

5. Any decrease in the repo rate will be easily transmitted to the lenders via external benchmarking.

6. In addition, the review period was also shortened from one year under the MCLR to two months at publicly benchmarked lending rates (BLR).

This is advantageous to the borrower as interest rates are lowered but will work against the borrower when rates rise, as rate transmission will occur earlier, at most within two months of a shift in the RBI repo rate.

 

Navi Mumbai Property Rates Commercial / Residential January – 2020

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