Banks are aggressively wooing small-size home loan customers with a substantial cut in interest rates, says Prabhakar Sinha

Not only have prices of houses fallen in the last one year, but interest rates on home loans have also been cut substantially in the last nine months. In particularly, on smallsize home loan of less than Rs 30 lakh, interest rates have fallen from the range of 11% and 12% down to 8% and 9%. The fall in interest rate from 12% to 8% has led to a fall in the EMI by 24% on a 20-year loan.

The EMI on Rs 30 lakh loan for 20 year at 12% was Rs 33,032, which now works out to Rs 25,093 after interest rates fell to 8% — and for an interest rate of 9%, it translates in a fall in EMI by 18.25%, to Rs 26,991.

With onset of the festival season, banks like State Bank of India (SBI) and Punjab National Bank (PNB) have not only cut interest rates but have also waived the processing fees. Other lending institutions like HDFC Ltd and ICICI Bank are also giving loan at a competitive rate. SBI has launched a home loan scheme, in which the interest rate for the first year is charged at 8% and for the next two years at 8.5%. And then links it with their benchmark rates.

In fact, the aggressive posture of SBI has forced other banks to follow suit. After the SBI’s announcement, PNB cut its home loan rate to 8.5% for the first three years and then will link it with the then prevailing market condition. HDFC Ltd is also giving loan between Rs 30 lakh and Rs 50 lakh at 9% for the entire duration of the loan repayment period. SBI has effected the steepest cut on home loans between Rs 30 lakh and Rs 50 lakh. The interest rate will continue to remain same for the first year at 8%, while the rate for second and third year has been brought down to 8.5% from 9.5%, and beyond third year, the floating rate on the loan has been cut by 1.25 percentage points. Earlier, the rate was pegged at 1.5 percentage points below PLR, which has now been lowered to 2.75 percentage points below the benchmark rate. So, the effective home loan rate will become

lower. If the present condition remains the same and the bank does not change the prime lending rate, the new rate will be 9% as against 10.25% earlier.

In the case of home loan up to Rs 30 lakh, the benefit for the first year will remain the same with interest rate at 8%. But for the next two years, interest rate has been cut by 0.5 percentage points to 8.5%, from 9%. And after that till the loan is repaid, interest rate will be pegged against the benchmark rate. But the discount against the benchmark rate has been increased by 75 basis points. If the present condition continues and the bank does not change the PLR, the effective interest rate on the home loan after three years will be 9% as against 9.75% earlier.

High-end customers will also find an advantage in SBI Advantage Home Loan for loans above Rs 50 lakh. The SBI loan will come with a fixed rate of 8% per annum (unchanged) for the first year, and 9% for second and third year — down from 9.5% earlier. After that it will be linked with the PLR of the bank but with bigger discount of 1.75 percentage points as against 1.25 percentage points earlier. That means, even after three years, the interest rate will be half a percentage point lower than what it could be in the earlier scheme.

With lower repayment obligations during the initial fixed rate periods of 3 years, the customer can buy a new house without compromising on the lifestyle of the family, said a SBI official. After three years, the income level of the borrower will also increase. So, even if the interest rates go up marginally, by half a percentage points, it will not affect his repayment capacity much.

Courtesy:- TOI dt:- 15-08-09