Why mortgage interest rates are dropping and what the buyer should do

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Banks and housing finance companies are competing for home buyers with the interest rates offered in the home loan segment worth over Rs 14 lakh crore. As the State Bank of India, HDFC and Kotak Mahindra Bank cut mortgage rates to the lowest level in nearly 15 years, other lenders are gearing up to join the race.

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Which banks have recently cut mortgage rates?

On March 1, Kotak Mahindra Bank cut the interest rate on its home loans by an additional 10 basis points to 6.65% per annum, the lowest in the mortgage market. He said the rates are tied to borrowers’ credit rating and the loan-to-value ratio (LTV). The tariffs will be applicable to both employee and self-employed customer segments.

On the same day, SBI offered interest concessions up to 70 basis points with interest rates starting at 6.70% (limited offer ending March 31, 2021). Two days later, HDFC cut mortgage interest rates by 5 basis points to 6.75%.

SBI also grants a 100% exemption on processing fees. The interest subsidy is based on the loan amount and the borrower’s CIBIL score. The borrower can apply from home via the YONO app for an additional interest reduction of 5 basis points. A special concession of 5 basis points is made available to women borrowers. “Reduced interest rates are one of the best interest rates for home loans one could want,” said Saloni Narayan, DMD (Retail Business), SBI.

Why are banks doing this?

According to the RBI, growth in home loans slowed moderately in March 2020, and this extended into 2020-2021 due to the pandemic. From 17.5% in January 2020, home loan growth fell to 7.7% in January 2021. Banks have realized that home loans are safe bets in the current scenario because the risk of default is minimal . Gross non-performing assets are only 0.67% in the case of SBI.

SBI-led public sector banks, which previously focused on large business loans, are now targeting home loan clients. Housing finance companies like HDFC and LIC Housing also set their prices aggressively. The competition is reflected in falling interest rates, at a time when the real estate industry is experiencing some kind of recovery.

Should we opt for a mortgage now?

“This is indeed the best time to buy a house,” said Ambuj Chandna, president – Consumer Assets, Kotak Mahindra Bank, while cutting rates earlier this week.

“With mortgage interest rates at their lowest in 15 years and house prices sluggish, now might be the perfect time to take out a home loan. This could be the lowest possible EMI in the near future. Bond yields are rising. We don’t know where the interest rates are going, ”said an official at a nationalized bank.

Banks hope that the ongoing economic recovery will lead to more home purchases. After reducing the repo rate by 40 basis points to 4% cent in the May policy, the RBI kept the rates unchanged. On average, SBI receives around 1,000 mortgage clients per day. “Despite a massive decline in the real estate sector triggered by the pandemic-induced foreclosure, the housing sector has seen unprecedented growth in the mortgage lending industry. The SBI saw mortgage lending growth in December 2020 with the highest sourcing, sanctions, disbursements and growth the bank has ever seen, ”said SBI Chairman Dinesh Khara.

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Why focus on home loans?

The biggest attraction for lenders is that home loans are virtually risk free. Unlike personal loans, home loans involve collateral – the house itself. In the event of default, banks can seize the asset and sell it at auction. In addition, banks largely target the salaried class and independent professionals because timely repayment is assured. The processing of mortgage disbursement is also easier.

SBI’s home loan portfolio has now passed the Rs-5-lakh-crore mark, giving the bank a one-third market share in the segment. Other PSU banks are also increasing their presence in the segment. On the other hand, due to stressed assets in large industries, bankers were generally reluctant to lend to businesses, with the problem compounded by the pandemic.

Will the rates fall further?

Mortgage rates are already at their lowest for 15 years. Also, the RBI is unlikely to opt for another cut in repo rates in the near future as bond yields rise. Bankers have already indicated that interest rates have bottomed out.

The latest mortgage rate cut announced by Kotak Mahindra and SBI only goes until March 31. A further drop may affect banks’ margins because the one-year term deposit rates are now 4.9% (SBI rate). Any further decline in mortgage rates will cause deposit rates to drop again, which is unlikely. However, customers can expect benefits such as waived processing fees and reduced rates for specific periods of one or two months.

What is the current trend in the segment?

At Rs 14.17 lakh crore in November 2020, the total outstanding home loans accounted for over 50% of personal loans granted by banks. This sector has been the main driver of growth in the personal loan segment.

The recent deceleration in the growth of home loans is, however, worrying because of the effect it may have on sectors such as steel, cement, construction, etc. the back of government support given to this sector. As the economy grows, home loans are expected to pick up, according to an RBI study.


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