Taking a bow

The party bells are ringing for the home loan borrower. After three years of rate increases, a slew of banks have started offering discounts on lending rates for fresh home loans. While existing borrowers will not see a rate reduction, new borrowers will get better rates.

For this season, HDFC has cut its floating rate by 0.25 per cent to 11 per cent, while Bank of Baroda slashed its rate by 50 basis points to 11 per cent for loans up to Rs 20 lakh and 11.25 per cent for loans over Rs 20 lakh.

Many banks are likely to announce festive discounts as abundant liquidity has seen bank flush with funds.

During festive seasons, banks usually announce special schemes to attract more borrowers. “This is generally a yearly phenomenon at the beginning of the festival season,” says Mukund Hari Jachak, Head (Retail Cell), Bank of Baroda, Chennai.

The liquidity crunch has eased a bit which has helped banks offer lower rates.

Besides, some discount schemes are unique. State Bank of India has a policy of offering discounts on housing loans on certain dates.

For now, the existing borrower is not likely to see a rate cut anytime soon. Over the last three years, the cost of funds for banks increased with the increase in the interest rates in the economy. It will take at least another two or three months for benchmark rates to ease, if the liquidity scenario improves, for existing borrowers to benefit.

Another reason for the easing of rates, reckons Jachak, is the slowdown in industrial output, which had dipped in July. If this becomes a cause for concern for the government, then interest rates could ease for SMEs and, subsequently, for retail loans, too. “The home loan portfolio is the cheapest and a reduction in the prime lending rate will benefit existing borrowers eventually. There is a likelihood of a 25 basis points reduction by December,’’ says Jachak.

Fixed rate loans, it may be noted, are 100 basis points higher than floating rates. Fixed rates have climbed to 13.5 per cent (for a 15-year loan) and have again come down by 100 basis points. But the rates are still not as low as they were in June 2006.

Should you opt for fixed rates? Not at all, the markets are still volatile, says Jachak. Eventually, home loan rates will come down to what it was 14 months ago, but one has to be patient and catch this cycle and enter at the right time for fixed rates. For now, the floating rate loan is still the best option.