Do you have a home loan or are you looking to take one soon? Then you’re probably keeping an eye out on the RBI’s future policy moves, hoping it will slash key rates, so your EMI gets reduced just a wee bit.
Sorry to dash your hopes but we think it may be best not to play this waiting game, because we believe the central bank will not slash rates in a hurry. There are, however, a lot of other things you can do to make sure that you get the best deal on your home loan.
It has increased its key policy rates by 75 basis points since September last year.
However, the good news is that very few banks have followed the RBI’s cue — they have barely raised their base rates (which decide lending rates for older borrowers) during this period.
In 2013-14, the average base rate for all banks has gone up by a mild 5 basis points, according to RBI data. The average lending rate on new loans has inched up by 10 basis points.
Leading banks such as SBI, ICICI Bank, HDFC Bank and Axis Bank have pegged up rates by a little more at 25-40 basis points during 2013-14. But these banks had the lowest base rates before this hike and thus still sport very competitive rates.
Today, after these hikes, SBI, HDFC Bank and ICICI Bank have the lowest base rate at 10 per cent, while Axis Bank is a tad higher at 10.25 per cent.
Some PSU banks, such as Bank of India, Canara Bank and UCO Bank, have base rates of 10.2 per cent.
Housing finance companies (HFCs), on the other hand, peg their home loan rates against the prime lending rate (PLR) — akin to base rates for banks. HDFC’s retail prime lending rate is 16.75 per cent currently while LIC Housing Finance’s PLR is 14.5 per cent.
For now, the RBI is unlikely to raise rates further, as risks to currency and inflation have receded. But it is not likely to bring down rates in a hurry either. The RBI remains committed to follow the disinflationary path and bring down CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016. A below-normal monsoon on account of possible El Nino effects, global factors impacting fuel prices, and supply side issues can keep inflation high.
Unless there is clarity on all these factors and inflation moves towards the RBI’s targeted level by next year, rate cuts are unlikely.
The good news, however, is that leading banks may tweak their rates to woo more customers. In the last one year, home loans to retail borrowers have become the rage with banks, with such loans growing by 17-18 per cent.
Home loans, being a secured loan product with lower risks on asset quality, have been an attractive lending opportunity for banks. This has sparked competition among banks to garner a larger share of the market.
Here’s how you can choose the best home loans depending on your situation.
The cheapest loans After hiking their base rates during 2013-14, most banks and HFCs offer floating rate home loans in the range of 10.15-10.25 per cent for loans up to ₹75 lakh.
If rates are what matter to you, then both SBI and ICICI Bank are neck and neck with the lowest offer at 10.15 per cent. So, you can go to either of these banks if you want the cheapest home loan.
SBI hiked its base rate by 30 basis points in 2013-14 and may hold it for the rest of the year. Recently, ICICI Bank reduced its home loan rates as a one-time offer (valid until June 30) without altering its base rate. Under this offer, a salaried person taking a fresh home loan up to ₹75 lakh will be charged 10.15 per cent.
Women borrowers will be charged 10.1 per cent. Other banks may follow suit.
Only a few PSU banks — Bank of India, Canara Bank and UCO Bank — offer home loans for the aforementioned amount at 10.2 per cent.
Most other banks charge 10.25 per cent. The largest home lender HDFC offers a 10.25 per cent floating rate home loan for up to ₹75 lakh.
If the EMI is your worry, you should opt for the cheapest home loan without worrying about rate direction.
If rates were to trend down from here on, it is the large banks which are likely to lower their base rates first (SBI and ICICI Bank base rates at 10 per cent).
This is because they will be able to re-price their deposits faster in a declining interest rate scenario and bring down their cost of funds.
If rates rise, you will still be better off because your EMIs are lower than those with other banks. HDFC Bank sells home loan products offered by its parent HDFC, so base rate changes may not impact home loan rates (HDFC sets its home loan rate based on its benchmark BPLR).
You love predictability and these floating rate home loans make you nervous. Should you opt for fixed rate loans then? No, for two reasons.
Fixed or floating? One, fixed rate home loans are not a good idea, considering that we may be at the peak of the current rate cycle. Rates may start to cool off over the next two to three years. As the new government kick-starts stalled projects and ushers in new investments, some of the supply side concerns on inflation should recede.
This may lead to a more accommodative monetary policy by March 2015. Locking into fixed rates now would mean losing out on possible downtrend in rates.
Two, pure fixed rate schemes charge too high a premium for their predictability. LIC Housing Finance, for instance, charges 12.25 per cent while Axis Bank charges 11.75 per cent.
This is a steep premium of almost 150 basis points over what most banks offer under floating rate schemes.
This translates into an additional outgo of ₹5,651 on your equated monthly instalment (EMI) assuming you’ve taken a ₹60-lakh home loan for 15 years. Isn’t this too high a price to pay for predictability?
In fact, most leading banks do not offer fixed rate home loan options.
Apart from pure fixed rate schemes, banks and HFCs also offer dual rate schemes, wherein rates are fixed for one or two years and then get converted into floating rates. Some of these rates are comparable with those offered under the floating rate option.
For instance, LIC Housing Finance offers a fixed rate of 10.1 per cent for two years, after which it gets converted into floating rate.
Similarly, ICICI Bank has a fixed rate of 10.15 per cent for one or two years.
But if rates are expected to come down in the next one to two years, then locking into such schemes will only make sense if the interest rates charged for the fixed tenure are much lower than the existing floating rates.
At this juncture, it is thus not advisable to go for dual rate schemes as you may lose out on rate cuts over the next one year or so.