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After 3 yrs, home loan rates head down


After 3 yrs, home loan rates head down

Last updated: September 10 2007
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  • After 3 yrs, home loan rates head down

    Here's some good news for all those people who dream of buying their own house but have been deterred from doing so by soaring interest rates. Home loan rates are finally showing a downward trend after nearly three years, thanks to banks suddenly finding themselves flush with funds.

    Three lenders have already kicked off rate cuts. HDFC Ltd had cut its floating rate by a quarter a percentage point (0.25%) to 11% under its special monsoon offer, in addition to lowering the processing fee. Last week, Bank of Baroda pruned rates by 50 basis points to 11% for loans up to Rs 20 lakh and 11.25% on loans above Rs 20 lakh. Allahabad Bank too joined the party, cutting its rate by 1 percentage point cut to 12% for 25-year loans. . But there's a catch: the offers have so far been confined to new borrowers. Existing home loan customers will have to wait for a while to enjoy a reduction.

    Several other lenders, including the likes of SBI, are expected to follow in the coming weeks. Initially, it will be pitched as a festival bonanza, but bankers say the reduction will continue even later as they plan to pass on the decline in the cost of funds — with deposit rates having already been slashed — to borrowers.

    Interestingly, several lenders have already cut rates without making any announcements. The reduction — for new borrowers — is in the form of a discount on the benchmark rate by 50 basis points. The interest on floating rate is pegged to a benchmark reference rate, known as prime lending rate or floating reference rate. None of the banks have decreased their benchmark reference rate. But many have increased the discount they offer on the reference rate, effectively lowering the home loan rate for fresh borrowers.

    Existing borrowers will only benefit once the reference rate is lowered. But bankers suggest that people who have already borrowed should not lose hope as continued high liquidity in the system will lead to lowering of benchmark rates over the next couple of months. Bankers said there was abundant liquidity, forcing them to scout for good customers. With bad loans accounting for less than 1% of the home loan portfolio, the segment is once again emerging as a lucrative option for bankers and prompting them to offer lower rates.

    The current round of rate reduction will be the first since November 2004. Between then and March 2007, home loan rates were revised eight times, with interest rates rising from 7% to 12% during the period. As a result, EMIs have increased nearly 40% since 2004-end.

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