Have home loan rates reached rock bottom?

At sub-7 per cent, the rates are at their historic low. In 2003 and 2004, it was 7.25 per cent; and in 2011, as high as 11.75 per cent

In October 2003, ABN Amro Bank announced its entry into India’s mortgage market, offering 6 per cent interest rate on home loans in the first year and 6.5 per cent in the second year. The special product, called “super saver loan package”, was designed to woo at least 10 per cent of then Rs 50,000-crore mortgage market.

Such loans were linked to the prevailing floating interest rate of the bank from the third year. Around that time, the home loan rates of other banks were in the 7.25 per cent to 7.75 per cent range. The Dutch bank’s floating rate was 7.75 per cent.

So, in the first two years, a prospective customer would have got a home loan cheap but over a 20-year tenure of the loan, the difference in the interest rate would not have been substantial. Still, it sparked off a rate war on the home loan turf. The business for all banks began expanding and, at the same time, the banks started poaching each other’s home loan customers.

The next shake-out in the mortgage market happened in 2009 after the global financial crisis, triggered by the collapse of iconic US investment bank Lehman Brothers Holding Inc. State Bank of India introduced “teaser loans” for home buyers at the rate of 8 per cent in the first year. The home loan rates of other banks at that time were in the 9.5 per cent to 10 per cent range.

The 8 per cent hook encouraged many to buy homes (the real estate prices too crashed at that time but recovered within months and started rising sharply) but State Bank’s “happy  home loan offer”  had more to do with encouraging consumption than intensifying competition. It was withdrawn later as the banking regulator was not too happy with the structure of the product.

Typically, State Bank takes the lead in loan rate cuts and others follow. But post the global crisis, Punjab National Bank went ahead and cut its loan rates ahead of the nation’s largest lender. State Bank reacted with a new home loan product.

This is history. Now the home loan rates in India are at their lowest. They are not driven by any special package. Most banks and exclusive mortgage lenders such as Housing Development Finance Corporation (HDFC) are offering home loans at 6.95 per cent to the best-rated borrowers. Bank of Baroda’s offer is even lower — 6.85 per cent.

 

 

The backdrop of this is India’s historic low policy rate. Following two successive out-of-turn policy rate cuts, the Reserve Bank of India’s (RBI’s) repo rate or the rate at which the commercial banks borrow from the central bank is now 4 per cent. The reverse repo rate, or the rate at which the banks perk extra liquidity with the RBI, is 3.35 per cent. Since the system is flush with liquidity, and the banks, instead of borrowing from the RBI, are parking money with the central bank, for all practical purposes, India’s real effective policy rate is now 3.75 per cent, down from 5.15 per cent in March.

With the drop in policy rates, the banks have pared their deposit rates. For instance, State Bank is offering 2.7 per cent to it savings banks customers – again a historic low. Uco Bank is offering even less — 2.5 per cent for money kept in savings bank accounts, up to Rs 25 lakh. Most high street banks have kept their fixed deposit rates for different tenures within 6 per cent.

Over the past five years, many banks — particularly the government-owned ones — have stayed away from giving money to corporations for fear of the loans turning bad. They have been focussing on the retail segment, consisting of home loans, auto loans and personal loans.

Now, with plenty of money in their kitty and the cost of money coming down, most want their mortgage business to grow. Saddled with inventories, the builders across states are ready to offer hefty discounts to those home buyers who have banks’ sanction letters ready.

The banks are offering home loans either linked to their marginal cost of funds-based lending rate (MCLR) or an external benchmark, that is the RBI’s repo rate. In mid-June, State Bank announced cutting its external benchmark-linked lending rate by 40 basis points, from 7.05 per cent to 6.65 per cent. It also reduced the MCLR by 25 basis points to 7 per cent. State Bank is now offering home loans to women at 6.95 per cent — 5 basis points less than men home buyers. One basis point is a hundredth of a percentage point.

HDFC too cut its retail prime lending rate in the second week of June. Its effective interest rates range between 6.95 per cent and 7.6 per cent, based on the credit score of the borrower, a salaried person. This is for a loan amount of up to Rs 30 lakh. If the amount is higher, the loan rate goes up.

Earlier, the rate structure for all mortgage loans was the reverse — the higher the loan amount, the lower the loan rate. The logic behind this was one needed the same effort to acquire a customer but a larger loan offers higher interest income. Now, loan rates of up to Rs 30 lakh are cheaper.

Banks are aggressively looking for customers in this segment as housing loans of up to Rs 35 lakh in metros and Rs 25 lakh in non-metros are treated as the so-called priority loans that must constitute at least 40 per cent of a bank’s loan book. Of all the loans that enjoy the priority tag, home loans are the safest as they are fully collateralised. The higher the loan amount, the bigger the risk and that reflects in the pricing of the loans.

This is for the first time the home loan rates have dropped below 7 per cent. If one goes by the HDFC home loan rates, historically, they were at their lowest between February 2003 and November 2004 — 7.25 per cent. Early this century, the rate was 7.5 per cent and in 2011, it was as high as 11.75 per cent.

Have the home loan rates reached rock bottom? There could be another round of cut but once the Covid-19 impact wears off and consumers start taking decisions on home buying, rates will go up.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd.

Twitter: TamalBandyo 
 

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