Home Loans may see an Interest Rate War

The State Bank of India’s (SBI) intertwined figure, the magical 8, is no longer the lowest interest rate available in the scheme of housing finance today. Development Credit Bank, a new entrant in the market is now offering home loans at 7.95 per cent for loans up to Rs 5 crore at fixed interest rate for the first year and floating rates from year two.

The bigwigs in home loans have more to worry about other than their existing differences. We may all remember in March this year when HDFC referred to SBI’s 8 per cent strategy as a gimmickry. Now they have to contend with the likes of a further reduction by 0.05 per cent.

With the real estate sector creeping up the prices of property over the last few weeks, the only solace for a buyer may end up with housing finance institutions to counter balance the ill effects of inflated costs involved in the ownership of a house.

It is obvious that SBI’s 8 per cent move has worked and has convinced buyers to make the switch, even resorting to pay the penalties to their existing banks in order to sustain long term gains.

GIC Housing is another institution which has gone below the 8 per cent mark. These are the seeds of a fair economic competency among financial institutions, each prying for a fair piece of the cake. But will the tactic work?

Arun Sarvankumar, employed within the vast expanses of the services sector, recently took a loan with SBI. “I was aware of what DCB and GIC had to offer but I still went in for SBI. It is a good brand out in the market and is something that I trust. I did not even bother to enquire about their offer.”

It is to be understood that financial institutions which raise money through lower rate of interest can lend at a lower rate. The initial rate of interests is available only for a year or two, after which the rates really start in to in pinch. ICICI, for instance, is expected to raise their PLR because they lent at aggressive rates. ICICI has lost many of their loans to other banks – mostly to SBI – in lieu of their policies. Even the aggressive approach needs taming, which will ensure that interest rates will rise to cover their costs later.

“I think there will be rate of interest war amongst housing finance companies. It allows the consumers a better opportunity in this regard. SBI itself would capitalise on this as this move may get in more customers in a way,” said Mr Sanjay Paras, Business Development, SBI.

These rates are beneficial for the low income group which constitutes the massive population of the country. It will entice this segment to buy property. But one has to realize that the installments would have to be paid. And any upward revision of the interest rates in the future may prove to be a setback. Ideally, it’s the property rates that should drop, to claw on the two words which constitute the very need of the masses, “affordable housing”. Only time will tell what the interest wars would lead to.