Should you Apply for Home Loan with a Bank That Has a Tie-up with your Builder?

A housing property is one of the best and most practical investments you can make. It ensures financial stability for the future and doesn’t have a high risk factor involved in valuation.

You need to do a thorough research on the parameters involved in the process of loan application as Home Loan is an expensive investment, that takes up a huge chunk of your savings and income. After enquiring about the current lowest Home Loan interest rates, flexible payment schemes, and other features that the financial institution offers, you identify the bank or NBFC that has the best loan for you.

There can be some cases where the builder of your home has a tie-up with a certain financial institution and insists on you taking up the Home Loan with that institution.

You might be suspicious, or uncertain about the whole deal. Your concern about the whole scheme could be due to the rise of many fraudulent developers led by the increasing demand for homes on the real estate front. Builders have properties that aren’t approved by financial institutions, and sometimes the builder itself is not recognised by your bank or NBFC. In rare cases, certain phases of a project aren’t approved. With all these prevalent risks, the possibility of your investment going down the drain is quite high.
But is it really an alarming situation? Or should you go ahead with the builder’s choice of lender?
Applying for a Home Loan suggested by your builder isn’t such a bad idea. It is basically a simple strategy used by builders and financial institutions, which has no impact on your Home Loan interest rates or any other corresponding factors. You also have several benefits in store when you opt for such a scheme.

Benefits of Home Loans with Institutions Tied-up with your Builder

Builders have tie-ups with financial institutions in an attempt to gain the confidence of more customers and increase their sales. Even though the scheme is mainly centred around the builder’s profit, borrowers have a lot to gain from it, too.

Not all banks and NBFCs approve all builders. With your builder tied-up to a particular bank, you don’t have to run around looking for a bank where your property is recognised. The same works for property approvals as well.

Certain builders get the project pre-approved just before the launch and a make major deviation from the proposed project layout. Banks do not approve such developers, giving you the convenience of a hassle-free loan.

One of the several benefits of Home Loans is that the lender carries out a strict due diligence when funding a project. Due diligence, in plain words, is ensuring a step by step and detailed record of the procedures and necessary information to prevent any type of errors or offences. It also refers to the precautions a person needs to take before signing up an agreement with another party.

Builders who have a tie-up with lenders, more often than not, offer subvention interest schemes on loans.

Subvention Schemes

Subvention loans were originally granted to enhance the development of certain industries and provide relief to borrowers. The government would pay a small portion of the borrower’s loan. This concept was adopted by builders who now offer their own version of subvention on the interest rates.

As a buyer, you will be entitled to offers like small periods of EMI holidays and pre-EMIs that are paid by the developer. You pay 20% of the loan amount beforehand to the builder. The financial institution pays the remaining 80% to the builder during later stages of construction. The builder pays your pre-EMI, relieving you of a part of the loan amount.
Why do Banks Tie-up with Builders?

Banks and NBFCs that offer loans can attract more customers. A tie-up with a developer gives the benefit of both—provision of a Home Loan facility and also guaranteed loan customers. The tie-up speeds up the process of disbursal of the debt amount. Each project by a single developer is sure to bring quite a number of clients to the lender, which makes the financial institution gain a high popularity, reputation, not to mention the increased profit margin.
Builders who have many debts opt to associate themselves with banks and NBFCs, use loans as a means of generating commissions on each transaction. Even though the commission is as small as 0.5-1%, the builder eventually earns a lot on the several transactions that follow. Some reputed banks are also known to charge a high commission to their associated builders.

A builder pays an interest of 13-22% on the initial capital amount received at the start of the project.

Reputed and approved banks are known for their rigid due diligence policies. Builders opt to associate with these banks so that they can save the time spent on getting approvals. Such banks portray trustworthiness and this quality helps the builder get more customers.
Though NBFCs are said to have lesser stringent due diligence policies, they are capable of providing the services that you, as a borrower and buyer, are looking for.

In short, it’s not a bad idea to apply for a Home Loan at the bank suggested by your builder. You have as many benefits to reap with this scheme as the bank, or NBFC, or the developer. The factor of risk is lowered drastically.

With that said, you still need to watch out for traps that could lead you to incurring loss. Watch out for housing finance companies that have tie-ups with builders, as they are very lenient with due diligence and give room for manipulation at the builder’s end. Ensure your developer has a tie-up with a reputed bank or NBFC, and that you know their policies and benefits in and out.

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