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Cheap Home Loans in India: Will They Ever be Available Again?

A home loan at affordable interest rates, particularly for the below Rs. 20 lakh segment, has long been a cherished dream of common man. But is it really possible to get a home loan, which fits into every budget? There are no simple answers to this question.

The home loans segment in India has witnessed a lot of movement in rates in the recent past. Home loan rates, which were around 7% floating rate of interest in 2004, are now greater than 10%. As a result, EMI payments on loan amounts have gone up. High EMIs have driven home loans out of the reach of many middle class families as the household budget cannot afford high monthly payments.

The seasonal festive discounts offered by leading banks such as SBI, ICICI, HDFC, Axis Bank etc. during the last quarter of 2007 rekindled some hope among the borrowers for cheaper home loans. However, these expectations were unmet when home loan rates did not decline after the RBI’s monetary policy review in January 2008.

A feature of the home loan market in India is that approximately 80% of the loan market comprises loans of below Rs. 20 lakh. So, clearly this segment is very important. In fact, recently, the Finance Minister Mr. P. Chidambaram repeatedly stressed the need for lower rates on sub-Rs. 20 lakh home loans. Additionally, the RBI has also done its part by assigning lower risk weight to home loans up to Rs 20 lakh, enabling banks to offer smaller loans at lower rates. But despite all the efforts by the ministry and the regulator, are the lending banks falling in line?

Very few banks, like the Kolkata-based UCO Bank, have reduced the interest rates on home loans due to the reduced risk provisioning for below 20 lakh home loan.  Other banks, both in the public and private domain have shown lukewarm response. The high inflation rate, which is hovering around 5% mark doesn’t allow banks to cut deposit rates. Consequentially the bankers feel that any further reduction in home loans rates will only eat into their profitability.  

At present Punjab National Bank (PNB) is offering one of the lowest rates on home loans. A Rs 20 lakh home loan for 20 years is available at 9.5% floating rate of interest at PNB. Oriental Bank of Commerce is offering the same home loan at 10%, HDFC at 10.25%, GE Money at 10.49%, SBI, Bank of Baroda and IDBI at 10.5% and ICICI at 11%. Despite the low rates offered by PNB, their home loan offtake has not increased substantially relative to other lenders.

Rising rates eat into a family’s household budget. An EMI of Rs. 18,643 will be required to service a home loan of Rs. 20 lakh for tenure of 20 years at 9.5% interest rate. For someone to afford this, their monthly pre-tax income ought to be in the range of at least Rs. 45,000 - Rs. 50,000. If the rate is say 10.5%, then the EMI will be Rs. 19,968. As can be seen, the higher the rate, the tighter the household budget due to higher EMIs. How many people can afford these rising EMIs is open to question.  

Further, as property prices rise, many families who could try to afford a Rs 20 lakh home loan are being priced out of the market. High interest rates coupled with unsustainable increases in property price have made the home loan borrowers think twice before jumping into the market.

Given the present cost of funds and pressure on bank profit margins, it will be difficult for banks to offer home loans at floating rates below 9%, despite all the pressure from the Finance Ministry and the RBI. So, if you are looking for a cheaper home loan and are willing to wait for sometime, you might be able to get a better deal. Otherwise there is always the option to compare home loans in India and find the best home loan right here at iTrust.