LoanRaja Blog- Personal Finance Guide

Home loans have been the flavor of the week with best rates for home loans— the finale being delivered on Monday, the 15th of December; when public sector banks announced reduced rates for home loans. Is that good news? Or are there any catches to it? One quick look at the balance sheet for home loans, as it appears now.

On the plus side:

• Housing loans are down with immediate effect to 8.5 % for loans up to Rs.5 lakh and 9.25 % for loans up to Rs.20 lakh.

The package effect does not include the above Rs.20 lakh category, but given the CRR and repo rate cuts, bankers believe that prime lending rates for not only home loans but all loans will drop anyway.

• The home loan package is only for public sector banks. But the private and foreign banks – which offer loans in the 13- 17 % range — may follow suit, partly driven by the market and partly to get a share of the sub 20 lakh loan segment, which is known to be a segment of high recovery. There are already reports of private banks taking a re-look at their interest structures.

• Borrowers will have to pay less margin money on home loans (that is the amount they need to pay upfront) which has been brought down to 10-15 % from 20-25 %.

• EMIs are not likely to change for five years, going by the announcement made by the PSBs. After that period, borrowers may be given the option of going in for fixed or floating loans.

• No processing and pre-payment charges and free life insurance cover for borrowers

On the plus side, the cut in rates by PSBs may force the private and foreign banks to follow suit. Today, the private banks are in the 17% range. However, the PSB’s generally cater to the sub 20 lakh loans.

 Competition from the package will see housing finance companies review their interest rates.

On the minus side

• Home loans flavor is only for existing borrowers. After all, the intent behind the scheme is to stimulate the economy, particularly the cement and steel industry rather than benefit for individuals. Still if interest rates fall, it is only a matter of time. (Overall, a plus)

• Banks may take a hit on home loans margins, but it is not expected to be for long. They will make up from gains in treasury, say bankers.

• Can’t see anything else?

The stock market too has reacted with caution but positively. Stocks in the banking and finance, cement and construction, engineering and capital goods industry have all gone up.

If the sub Rs 20 lakh segment picks up, it is a positive trend. This segment is known for the high rate of recovery, so will it attract builders who were so far focused on the higher end of the market and the commercial sector?

The other thing to watch out for is that a lot of builders have lost money; homes going vacant, being sold at discounts and a continuing cash flow problem in the industry, this is the time when builders may cut corners, put quality at risk.

The sub 20 lakh homes would be impossible to find in metros, and very difficult in larger cities. Will this package see more homes moving to suburbs, or to smaller towns and villages? Any views?