Banking on housing loan options

If you are looking for a home, the best way to get one is through a housing loan. Home loans today are an important offering in the bouquet of services that have a long-term impact on both consumers and the financial institutions.

Says A Shyamsunder, CEO, Disha Direct Marketing Services Pvt Ltd, “Fixed rate loans for the initial few years, then move to floating rates, top ups for interiors or redoing interiors of the house and property insurance being bundled with home loans are some of the new features. Keeping the loan cheaper for the customer at the entry level and giving the flexibility of floating which is an advantage in case the interest rates start falling is another aspect. Property insurance secures the property which is mortgaged to the bank in case the same is destroyed in an accident or natural calamity.”

The government’s interest subvention scheme is part of its efforts to make housing affordable to all and this effectively means that the government will pick up part of the interest burden on a home loan, subject to conditions.

The finance minister has announced the 1% subvention in the budget on housing loan up to Rs 10 lakh where the cost of the house does not exceed Rs 20 lakh. This scheme is available till March 31, 2011. Speedy pre-approvals and disbursements are other features banks advertise.

Move to base rates

From July, bankers moved towards a new system of benchmarking the lending rates that replaced the bank prime lending rate (BPLR). Henceforth, new loans will be linked to the base rates. This option is also open to existing borrowers. Banks followed the BPLR rate regime till June 30. Since July 1, the base rate regime has come into force, the rate below which banks cannot lend. Existing borrowers can continue with the old PLR-linked loan rates or shift to base rate-linked rates.

Many banks are already nudging customers towards the base rate regime because they do not want to maintain two records, one for the new and another for the existing customers. As lending rates currently are a bit haphazard and there is a huge difference among banks in the rates offered on home loans, the government intends to get some sort of uniformity within the system.

Opines Anil Rego, CEO & Founder Right Horizons, “One can evaluate the current home loan rate and see whether it makes sense to move to the base rate. In the past, the existing home loan customers did not benefit from lowering interest rates since banks used to keep the PLR intact but offer lower than PLR rates for new customers only. This will bridge the gap.”

Teaser rates

Teaser rates have been the newest feature of home loans in the recent past. Banks are introducing a fixed interest rate, approximately at 8.5% for the first two to three years thereby giving buyers a predetermined EMI at least for the first two to three years.

Teaser loans which were introduced a couple of months back offering interest rates at 8-8.25% garnered more attention probably as many customers were not aware of the implications of the base rate versus their existing rate on the loan.

 Explains Rustom Bharucha, Managing Director of PRA Realty (I) Pvt. Ltd., “these features were introduced to help improve demand for housing when the markets had slumped. They continue to remain attractive because of competition between private and public banks and obviously because banks feel customers will continue to be attracted to a product that is able to give them predetermined EMIs for the first few years which are very comforting.

“We believe the response to these teaser rates has been very good. Anything that will reduce the ultimate purchase price of a home is always welcomed by customers. Banks must be sensitive to the fact that interest rates need to be stable in order to act as a booster to the real estate industry which is yet to fully recover from the market slump.”

Increasing rates

The question that arises in the light of increasing interest rates is whether home loans will continue to be attractive. “Housing finance companies have suggested that they would not increase the home loan rates – this has driven many prospective home loan borrowers to HFCs.

There are other banks which launched special rates for loans upto Rs 20 lakh. Further many banks are also offering transfer from current regime to base rate regime without any extra cost on transfer. In the medium term, home loans are likely to become more costlier. However, this is only going to impact if the interest rates go up beyond 1% or so,” says Rego. However with rising inflation and after RBI increased its policy rates it would be very difficult for banks to hold on to these teaser rates or keep interest rates stable at current levels for much longer.

Developers will need to re-work their pricing strategies to account for this increase in rates so that the consumer doesn’t bear the entire burden. Lenders have hiked interest rates in line with the Reserve Bank of India’s hawkish policy stance. Following it, the banks have made the loans costlier by up to 75 basis points for existing borrowers.

The decision by the country’s two largest lenders comes on top of an increase in the cost of funds on account of the RBI's strong inflation control measures. Several banks had hiked their interest rates following the RBI’s first quarterly review of the monetary policy, in which it raised the short-term borrowing (reverse repo) rate by 50 basis points and lending (repo) rate by 25 basis points to tame inflation. 

Says Dhiraj Jain, MD, Mahagun Real Estate Pvt Ltd. “In the past month, many existing home loan borrowers would have found their lending rates rising. Many banks, including State Bank of India, ICICI Bank and Punjab National Bank, have raised their benchmark prime lending rates (BPLR).

Borrowers will now face either of these two situations — rise in equated monthly instalments (EMIs) or tenure. While the increase in benchmark prime lending rates will make existing loans from the country’s largest lender dearer, the hike in deposit rates will ensure better returns for deposit-holders. It makes sense to shift.

With the Reserve Bank of India mandating that there can be no charges on shifting from existing to base rate, borrowers should take advantage of that. The basic advantage here is that unlike PLR, the base rate is the minimum lending rate for banks and, hence, it can be raised only to a certain extent. Otherwise, banks will lose business.

Also, the base rate will be stickier, so rates will go up slowly.” So if you are opting for a home loan, study all these aspects and make an informed decision.