Good News! Home Loans Are Becoming More Viable…

Have you noticed how “limited period only” offers create a sense of urgency? They make you believe, if you miss an opportunity to buy this product or subscribe to that service in a specified time, you’re probably losing out on a very attractive deal forever.

So far, we have seen consumer-goods companies and retail focused service providers launching such offers to attract customers.

But now, the trend is catching on fast even among bankers.

A huge pile of surplus cash and relatively soft demand for industrial loans has compelled banks to concentrate on retail banking operations. Going a step ahead, banks are busy launching offers with limited time periods for borrowers.

Without many exceptions, bankers will tell you they are concentrating on growing their retail banking at present.

Indeed individual borrowers are a safe bet for them, especially, when they are borrowing against a pledged security or a hypothecated asset. For example, home loans. This is one of the safest products bankers are aggressively pushing these days.

And, if you are a salaried employee with a stable job, surely, you are a VIP for your bank. If you are a new borrower, this could be the most exciting phase for you. This is because, rather than you approaching banks, banks are likely to approach you a number of times with attractive deals.

As you may be aware, banks offer you loans upto 75% to 80% of the property value. So they have little to lose here as property values in India don’t often fall to such an extent.

The country’s largest bank, State Bank of India, recently lowered home loan interest rates by 25bps (Basis Points) on loans upto Rs 30 lakh, which are now priced at 8.35%. It’s noteworthy that this limited period offer ends on July 31, 2017. It seems the bank is receiving a good response to its offer. The Managing Director, SBI, Mr Rajnish Kumar, recently said, “We have seen a steep hike in the home loan enquiries recently and reduction in rates will further help millions of buyers fulfil their dream of owning a home.” He further added that, “Over a loan period of, say 30 years, the borrower will save almost ₹2 lakh. Suppose, this saving is invested in recurring deposit, it will grow to about ₹6.50 lakh over this period,”

Broadly, home loans upto Rs 75 lakhs are priced at 8.35% to 8.85% currently across banks, which may appear really attractive to many of you.

But before you fall for this appealing offer do read about the probable disadvantages. Here are points to consider:

  • First and foremost, please understand, you are probably going to borrow at a time when there’s competition among bankers to offer cheaper home loans. Perhaps, they have assessed that the interest rates on home loans can’t drop much lower than the prevailing rates. In fact, the floating rates will offer them a substantial benefit if interest rates were to go up from hereon. All new loans are benchmarked to The Marginal Cost Lending Rate (MCLR). This is one of the most sophisticated ways to ensure the better monetary policy transmission. In other words, this system will be more efficient in passing on the hikes in the interest rates. Therefore, borrowers must keep a good margin in their budget to accommodate the potential increases in the home loan EMIs.
  • The bankers might try to convince you with illustrations of various benefits. But don’t fall for them. Understand a simple rule, longer the duration of the loan, higher the interest you will pay on it. In turn, this will push your overall money outgo drastically higher if you opt for long tenure loans.
  • While banks are lowering the interest rates, mind the loan processing fees. They range from 0.5% to 2.0%. Aren’t these high enough to negate the benefits you might derive through lower interest rates?

Limited period offers may provide you limited benefits. So, do your homework right.