Home loans: Private lenders or public banks?

The home loan market has been re-energised over the last two quarters by the reduction in property prices and interest rates. Another factor which has led to the spurt in demand for home loans are the teaser loans offered by various public sector banks (PSBs).

The PSBs have come out with offers where they are offering low attractive fixed rates for the first 3-5 years (8-8.5%), with rates reverting to the standard floating rate after that period is over.

Such loans are popularly called teaser loans, where the rate in the initial years is fixed as well as low. On the other hand, private banks are offering floating rate products which are reasonably priced but are floating from the first day itself.

In fact, the effective rates of PSBs, after factoring in the floating rates at the end of the teaser period, is more  or less in line with what the private sector lenders are offering (see table).

Yet, customers are clearly exhibiting a marked preference for the teaser loans from the public banks. The reason is not very far — PSBs are offering fixed rates for the next few years even as interest rates are widely expected to go up in the near future. This feature clearly gives some element of safety and comfort to borrowers.

Secondly, the PSBs have been far more responsive in reducing rates for existing customers when rates fall, thus making them more comfortable with a floating rate product (after the teaser product) from a PSB against a floating rate product from a private sector bank.

This is based on data culled from a report by the RBI’s committee on BPLR which says, “An increase in the repo rate was observed to bring about a contemporaneous change in modal BPLRs of private sector banks and major foreign banks and a lagged response in the case of public sector banks. A decrease in the repo rate had a significant contemporaneous impact only in the case of public sector banks. This asymmetric response shows that while public sector banks were slow to respond to an increase in policy rate, they were quick on the reverse. This could be attributed to the ownership structure of public sector banks which makes them more amenable to moral suasion by the authorities.”

Of course, one place where the private lenders score is the door-step service they offer to their customer, though PSBs are also fast catching up now.

“The introduction of teaser loans and the subsequent promotion of these schemes has attracted lot of customers for new loans and balance transfers… the customer stands to benefit’” says Varun Punani of Sriram Capital. “But what we have noticed is that the customer attaches lot of importance to the service received from the bank and not so much to the rate, particularly when he is making first time purchase. This is where private banks score. Hence, nearly our 70-80% business is with them. Now, even PSBs have intensified their service approach. All this has benefited the customer a great deal.”

So should you go to a public sector lender for a home loan if you are in the market at the moment or if you wish to shift from your existing lender? Of course, you should.

But do keep the following factors in mind: 

1.  PSBs are a good option if you are buying ready (or almost ready) flats directly from a reputed builder as the legal documentation is not such a big issue in this case. If you are buying a resale property, especially if it has passed through a couple of owners, it may be more difficult. Very old property (older than 25 years) may also be an issue. 
2.  Loan eligibility is unlikely to be aggressive so if the amount of loan is a major consideration, PSBs may not be the right fit.

3.  You’ll need to personally visit the bank a couple of times, so if you are the type constantly juggling appointments, then this may be a constraint.

Subject to the above, I will conclude by saying you should definitely consider shifting your existing home loan to a PSB or taking a home loan from them.

The writer is CEO, Apna Paisa, a search comparison engine for loans, insurance and investments.