New Delhi: Excess liquidity may pull down home loan rates in the near future. However, to wait for interest rates to fall for house purchase may prove costly, as the increase in property prices may offset any rate advantage.
Home loan rates are likely to come down soon. This will provide boost to the realty sector, which is languishing because of the lack in demand from the end users due to high interest rates.
As the banks are flush with funds, there is a downward pressure on general interest rate scenario in the market. However, bankers feel that this time lending rates will be brought down after the deposit rates are lowered.
Some banks like Union Bank and Bank of India have already lowered the deposits rates on medium term deposits of around one year by half a percentage point. Other banks are also likely to follow suit.
ICICI Bank deputy managing director Chanda Kochhar said that cost of short term funds have come down, which is reflected in the interest rates on government securities. Banks are lending at around half a percentage point in the overnight inter-bank money market.
A senior bank official said that as the net lending by banks upto July 06 in the current financial year is in negative by Rs 14,386 crore, while the net deposits have grown by Rs 1,05,534 crore, in the same period.
Therefore, banks at present are facing the problem of surplus liquidity in the system. A senior official of a public sector bank said that increase in the cash reserve ratio (CRR) — the requirement of banks to keep a certain portion of their deposits with the central bank — by half a percentage point by the Reserve bank of India (RBI) would not affect the liquidity condition much. The rise in the CRR by half a percentage point will mop up around Rs 15,000 crore from the system. But the system has a surplus of over Rs 50,000 crore. As the corporate borrowings have not picked up as yet in the current financial year, a banking source said that banks are looking at lending to retail customers.
Among the retail customers, the source said, home loan borrowers are considered to be good borrowers as the default rates in this category are very low at less than one per cent. At the same time, loan is secured as it is backed by security. Banks give only 75% to 80% of the fair value of the house as loan. Therefore, he said banks have enough cushion to recover the money by selling the mortgaged property if the borrowers default in repaying the loan.
At present, home loan rates vary from bank to bank. While ICICI Bank charges 11.5% to 12% on long term loan up to 20 years, housing finance company like HDFC Ltd charges only 11%. At the same time, LIC Housing Finance gives home loan at 10.5%. The interest rates of public sector banks like State Bank of India, Punjab National Bank and Union Bank vary between 10% and 11%. However, the home loan rates of foreign banks are upward of 12%.
However, the homebuyers should not wait for the interest rates to come down. This is simply because, if one wants to take benefit of present depressed real estate market, one should buy before the fall of the interest rates. When interest rates fall, the property prices go up. This has happened in 2002, 2003 and 2004, when interest rates fell from 12% to around 7%, the property prices appreciated sharply.
But if one buys a property before the fall in the interest rates, the initial equated monthly installments (EMI) would be high. But as soon as interest rates fall, the EMI will come down.
A fall in the interest rates by one percentage point, leads to decline in EMI on Rs 50 lakh loan, for 20 years, by 6.5% to Rs 48,251 from Rs 51,609. But, if the fall in the interest rate by one percentage results into increase in the property prices by 10%, the EMI even at the reduced interest rates would be Rs 53,076. That means, one will end up paying higher EMI than what he would have been paying at 11% home loan rate, which was Rs 51,609. But, if the property prices go up by even 5%, the EMI would be Rs 50,664.
As the loans are available at floating rates, one can avail the benefit of any decline in the interest rates in future. Therefore, to wait to fall in the interest rates to buy a house would not be a good idea. Particularly when a number of builders are ready to give huge discount to buyers. A builder said that at present it is the buyer’s market. In this, builders are ready to accept most of the term and conditions of the buyers. But, once the interest rates come down to single digit, there would be more demand than supply as was the case a few months back.