First-time home buyers often face the dilemma whether they should source a loan from a bank or a housing finance organisation. While they seem to offer similar services, there are differences in the way these institutions offer loans.
Many mortgage providers allow preferential rates for new buyers, while existing customers are charged high interest. The National Housing Bank, the central organisation for mortgage lenders, had issued an order in 2011 that new and old customers should not be differentiated when loans are offered. But that order was withdrawn in 2014. Now, while rate benefits are only given to new customers, even switching accounts carry a charge.
Banks decide on their interest rates on the basis of what is called as base rate. Before it came into existence, banks used to lend using prime lending rates, which is much higher than base rates. Housing finance firms do not have a base rate and what they offer are deep discounts on prime lending rates. That is why customers are often not able to reap the benefits of a drop in interest rates.
The Reserve Bank of India had issued an order cancelling foreclosure charges on mortgages. However, mortgage companies are lobbying the central bank to bring back foreclosure charges on the excuse that they would take years to make good the various charges involved while issuing a housing loan. They now want a foreclosure charge if the loan is repaid before seven years or a substantial amount is repaid in the first seven years.
Whenever one sources a loan, these issues need to be kept in mind.