Home loans to become costlier with increase in interest rates
For home buyers, planning to buy a house by availing a home loan, it is going to get expensive as the equated monthly installments increase. Several banks increased the lending rates this week and others are planning to follow the suit.
State Bank of India (SBI) increased its marginal cost of lending rate (MCLR), which is linked to the interest rate on funds raised by a bank by 0.20%. Like SBI, ICICI Bank and Punjab National Bank (PNB) increased their MCLR by 0.15%. PNB home loans will cost 8.6% for most borrowers, while women will get it at 8.55%.
SBI has a spread of 40 basis points over the MCLR for most borrowers and 35 basis points for women borrowers (100 basis points equal a percentage point).
The increase in home loan interest rates is a reversal of a one-and-a-half year’s trend wherein banks reduced their interest and gave a flip to the home buyer borrowing.
Following the lead of the State Bank of India, the private sector financial institutions ICICI Bank and HDFC reduced home loan interest rates for the new home buyers in May 2017. ICICI Bank had slashed its interest rate on loans up to ₹30 lakh by 30 basis points to 8.35% for salaried female borrowers. For other borrowers, the rate was 8.40%.
HDFC, India’s largest housing finance company, had reduced the interest rate to 8.35% for female borrowers and 8.40% for others for loans up to ₹30 lakh.
The State Bank of India, India’s largest lender, was the first to reduce interest rates on home loans of up to ₹30 lakh by 25 basis points. In the case of ICICI Bank, loans above ₹30 lakh came at 8.5% and 8.55% for women and other borrowers respectively.
RATE CUT
The trend of rate cut started in mid-2016, and in the aftermath of the demonetisation policy announcement the process speeded up wherein all the leading banks reduced the interest. At the time, the banks were awash with funds as people rushed to deposit their cash with them. SBI had revised its home loan interest rate from 9.10% to 8.60%. Between September 2016 and January 2017, banks and other financial institutions reduced home loan interest rates by 0.5% to 4.5%. Most banks reduced the MCLR, while the base rates remain unchanged. Since the end of the last year, though, the priorities of the Reserve Bank of India (RBI) have changed.
Keeping a check on the inflation, rather than speedy growth, is the priority now for the central bank.
THE IMPACT
It remains to be seen what impact the home loan interest rate has on the home buyer decisions.
In the last couple of months, there has been demand revival in the market as more and more end-users return. The different incentives for home buyers under affordable housing push of the government has revitalised the sector.
Under the ‘Housing for All by 2022’ mission, the NDA government at the Centre supports affordable housing through the credit linked subsidy scheme (CLSS) as a component of the Pradhan Mantri Awas Yojana – Urban (PMAY-U).
The scheme covers both the low income groups (LIG) and the middle income groups (MIG) of home buyers, and provides for 3% to 6.5% interest subsidy on home loans for different income and property size categories. The government also reduced the tax burden on affordable housing in recent notification.
A reduction of 4% in the Goods and Services Tax (GST) from 12% to 8% was made effective on January 25. The reduction is applicable for the CLSS for residential properties up to 645 sq ft.
“The impact of interest rate increase is expected to be minimal in short term as in a loan spread over 20 years, such marginal increase makes little difference to the EMI and over-all repayment. But, if this pattern of increase in interest persists then it can impact the sentiment. At present, there are indications that the market is on course for demand revival on the back of end-user activity in affordable housing segment,” said MS Mann, 49, a Ludhiana-based realtor.
HOME LOAN EMIS INCREASE AFTER DIFFERENT PRIVATE AND PUBLIC SECTOR BANKS RAISE INTEREST RATES