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Home loans set to become cheaper

Home loans set to become cheaper

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Indrajit Das
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indrajit_v5
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Home loans set to become cheaper - September 23rd, 2006

New Delhi: Home buyers can rejoice. Interest rates on home loans have started showing signs of easing off, an encouraging sign for the real estate market. The rate has been firming up for the last two years, when the floating home loan rate went up from 7% to 9.5%.
On Friday, the third largest bank of the country, Punjab National Bank (PNB) has announced a 0.25 percentage point reduction on floating home and car loan rates with effect from Saturday.
According to industry observers, though one of the objectives of the bank is to cash in on the festive season, the lower rate regime is here to stay. Market sources said the State Bank of India, is also planning to bring a special offer to lure customers during the festival season. However, no official announcement has been made yet. Other leading players ICICI Bank and HDFC are also likely to lower car and home loan rates.
A senior ICICI official, however, said there was nothing on offer as of ‘now’, refusing to divulge the future strategy.
PNB also reduced the processing fees on home and car loans by 50%. Banks charge 0.5% of the sanction amount or Rs 5,000, whichever is lower as processing fee. Now, this will come down to Rs 2,500 in case of PNB. To lure borrowers, PNB has also waived documentation charges completely.
After the reduction of 0.25 percentage point on home loan rates, the effective rate would be 8.5% for a loan with a repayment period of 5 years. For the loan of repayment tenure of 5-10 years, the rate would be 8.75%. The effective rate for 10-20 years would now come down to 9%. The bank, in a statement said that loans at a reduced rate would be available for a limited period of time.
In the last two years, home loan rates have gone up by 2.5 percentage points. There were apprehension, particularly in line of RBI’s thinking that if inflation flares, interest rates would further firm up. It is being feared that an increase in interest rates would affect the sentiment of the real estate market as this has made loans costlier and reduced people’s borrowing capacity.
PNB’s move to cut rates, a senior banker said, would ensure downward pressure on home loan rates. With steep competition, other banks would also follow the suit soon.
A quarter of a percentage point cut would ensure a reduction in equated monthly instalment (EMI) by Rs 16 per lakh. On car loans, PNB reduced the rates by 0.25 percentage point to 8.5% for maturities up to 5-7 years.
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