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Wednesday, June 29, 2022

Explained: Why home loan rates are falling, and what buyers should do

While State Bank of India, HDFC and Kotak Mahindra Bank slashed housing loan rates to the lowest level in nearly 15 years, other lenders are gearing up to join the race.

Written by George Mathew | Mumbai |
Updated: March 11, 2021 8:24:45 am
home loans, home loans rates, home loans rate in india, home loan interest rate, loan interest rate, home loan interest rate 2021, home loans rates, home loans rates fall, rbi rate cut impact loan emis, SBI home loans ratesSBI is also giving a 100% waiver on processing fees. The interest concession is based on the loan amount and the borrower’s CIBIL score.

Banks and housing finance companies are competing for homebuyers with the interest rates on offer in the housing loan segment that is worth over Rs 14 lakh crore. While State Bank of India, HDFC and Kotak Mahindra Bank slashed housing loan rates to the lowest level in nearly 15 years, other lenders are gearing up to join the race.

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Which banks have slashed housing loan rates recently?

On March 1, Kotak Mahindra Bank reduced its home loan interest rate by a further 10 basis points to 6.65% per annum, the lowest in the mortgage market. It said the rates are linked to borrowers’ credit score and the Loan to Value (LTV) ratio. The rates will be applicable for both the salaried and self-employed customer segments.

The same day, SBI offered interest concessions of up to 70 bps with interest rates starting from 6.70% (limited offer ending on March 31, 2021). Two days later, HDFC reduced home loan interest rates by 5 basis points to 6.75%.

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SBI is also giving a 100% waiver on processing fees. The interest concession is based on the loan amount and the borrower’s CIBIL score. The borrower can apply from home via the YONO App to get additional interest concession of 5 bps. A special 5-bps concession is being made available to women borrowers. “The reduced interest rates are one of the best interest rates in home loans anyone can wish for,” said Saloni Narayan, DMD (Retail Business), SBI.

Why are banks doing this?

According to the RBI, housing loan growth decelerated moderately in March 2020, and this extended further into 2020-21 due to the pandemic. From 17.5% in January 2020, home loan growth declined to 7.7% in January 2021. Banks have realised housing loans are safe bets in the current scenario as the risk of default is minimal. Gross non-performing assets are just 0.67% in the case of SBI.

Public sector banks led by SBI, which were earlier focusing on big corporate loans, are now targeting housing loan customers. Housing finance companies like HDFC and LIC Housing are also aggressively pricing their rates. The competition is reflected in the falling interest rates, coming at a time when the real estate sector is seeing a pick-up of sorts.

Should you go for a home loan now?

“This is indeed the best time to buy a home,” Ambuj Chandna, President – Consumer Assets, Kotak Mahindra Bank, said while slashing the rates earlier this week.

“With home loan interest rates at a 15-year low and property prices remaining sluggish, it may be an ideal time to go for a home loan. This could be the lowest possible EMI in the near future. Bond yields are rising. We don’t know where interest rates are headed,” said an official in a nationalised bank.

Banks are hoping that the ongoing economic recovery will lead to more home purchases. After slashing the repo rate by 40 basis points to 4% cent in the May policy, the RBI has kept the rates unchanged. On an average, SBI takes around 1,000 home loan customers on board per day. “Despite a massive setback to the real estate sector triggered by pandemic-induced lockdown, the housing business vertical registered unparalleled growth in the home loan business. SBI witnessed growth in home loans in December 2020 with the highest sourcing, sanctions, disbursements, and growth that the bank had ever registered,” said SBI Chairman Dinesh Khara.

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Why the focus on housing loans?

The biggest attraction for lenders is that housing loans are virtually risk-free. Unlike personal loans, housing loans involve a collateral – the house itself. In case of default, banks can seize the asset and auction it off. Moreover, banks are largely targeting the salaried class and self-employed professionals as timely repayment is assured. The processing of disbursing home loans is also easier.

SBI’s home loan portfolio has now crossed the Rs-5-lakh-crore mark, giving the bank a one-third market share in the segment. Other PSU banks are also increasing their presence in the segment. On the other hand, owing to stressed assets in large industries, there was a general reluctance on the part of bankers to lend to corporates, with the problem compounded by the pandemic.

Will rates decline further?

Home loan rates are already at 15-year lows. Besides, the RBI is unlikely to go for another repo rate cut in the near future as bond yields are rising. Bankers have already indicated that interest rates have reached the bottom.

The latest reduction in home loan rates announced by Kotak Mahindra and SBI are only up to March 31. A further reduction can affect the margins of banks as one-year term deposit rates are now 4.9% (SBI rate). Any further cut in home loan rates will mean a further reduction in deposit rates, which is unlikely. However, customers can expect sops like a waiver of processing charges and reduction in rates for specific periods of one or two months.

What is the current trend in the segment?

At Rs 14.17 lakh crore in November 2020, the total outstanding housing loans accounted for over 50% of personal loans extended by banks. This sector has been the major driver of growth in the personal loans segment.

The recent deceleration in housing loan growth, however, is a cause of concern because of the effect it may have on sectors like steel, cement, construction, etc. There are signs of a turnaround, as evidenced by a recent spurt in property purchases on the back of government support extended to this sector. As the economy gathers momentum, housing loans are expected to pick up, says an RBI study.

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