Home loan interest cut
For five years, the housing sector has been struggling with a slowdown. The demand is low and price correction the norm. Then came the demonetisation of higher value notes, which dashed any hopes of a quick market revival. The market sentiment, which was subdued, became more pessimistic. For the sellers, including developers, price cuts ensued, and for the buyer, liquidity crunch became a constraint in buying cheaper properties. The demonetisation forced all market stakeholders into a wait and watch mode. For most realty experts, the only way out of the pessimistic realty situation rested on financial institutions making cheaper credit available and cutting home loan interest rates to give a boost to demand in the sector. This week, these hopes started materialising as financial institutions, including banks, began slashing home loan interest rates. The largest bank in the country, State Bank of India (SBI), revised its home loan interest rate from 9.1% to 8.6%. Home loans up to R75 lakh, earlier available at 9.1%, can now be borrowed at 8.6%. For more than R75 lakh, the rate will be 8.65%, against 9.15% earlier.
Most other banks have also slashed home loan interest rates. ICICI Bank cut it from 9.1% to 8.65%, new HDFC Ltd rates vary from 8.65% to 8.7%, and Punjab National Bank rates are from 8.45% to 8.5%. Loan rates are lower for women than men.
In six months, banks and other financial institutions have reduced home loan interest rates by 0.5% to 4.5%. Most banks have reduced the MCLR (marginal cost based lending rates), while the base rates remain unchanged.
Better for buyer
“For the home buyer, it is all falling in place. First, the five-year market slump comprised sharp price cuts. Then the cash element in realty transactions, which used to add a sizeable value to the market price, became defunct after the demonetisation policy was announced. This made housing more affordable. With banks and other financial institutions reducing interest rates on loan, owning a home is becoming easier,” says Prakash Soni, 42, a senior executive in a private sector bank and a prospective home buyer. This is especially the case with the first-time buyers or buyers availing new home loans. They are charged interest rates based on the MCLR. For older borrowers, who borrowed before April 2016, the monthly instalments were linked to the earlier benchmark rate, the base rate. They would now have to get their loans linked to MCLR.
The home loan interest rate cuts translate into savings for the home buyer on the equated monthly instalments (EMI) and on a total loan amount to be repaid. For instance, for a loan of R50 lakh with duration of 15 years, and interest rate of 8.6%, the home buyer will pay an EMI of R49,530. At the earlier rate of 9.1%, he was paying EMI of R51,011. Over the full tenure of the loan, a home-buyer is expected to save
Rate cut impact
The home loan interest rate cuts are expected to bolster demand in the sector. “But don’t expect the demand to increase in the short term. At least till the start of the new financial year, most buyers are expected to adopt a wait and watch approach. In Punjab, the assembly elections are scheduled on February 4 and most home buyers are expected to wait till the new government is formed in March for making fresh investments in the sector. Realty stakeholders will also prefer to wait for the Union budget before they make their next realty move,” says Bhupinder Singh, 49, an SAS-Nagar based real estate consultant. So, for most realty experts, the impact of the home loan interest cuts is expected to be felt only in the medium and long terms.
“The immediate impact on the housing sector of the rate cut is the boost to market senti- ment. People now have an idea of the trajectory of market movement and are also considerably assured that the government and the financial institutions are moving on expected lines. Earlier, after the Reserve Bank of India kept the interest same and introduced a cap on banks releasing newly added deposits in the market, there was uncertainty in the sector,” says Singh.
Realty experts say more rate cuts are expected in the near future as banks are flooded with deposits after demonetisation was announced and it is imperative for demand revival in the housing sector. Market fundamentals of mismatch between what is available in the housing market and the demand nature will also impact any hopes of market revival. Most of the demand is concentrated in the budget and affordable housing, but, supply is concentrated in the above Rs 50 lakh bracket.