Home loans :

Home Loans: The Party Goes On!
Notwithstanding the likely marginal upward revision of home loan rates, the attractive rates coupled with tax incentives and the high returns on residential property present a strong case for the home buyers to make most of the home loan bonanza.

The last time interest rates on home loans were upped by 50 base points was in the last quarter of the year ended March 31, 2005. Barely had the dust settled down that there is now renewed talk of another, albeit marginal, upward revision by home loan players to the tune of about 25-50 points. However, industry experts are of the view that while a rate increase was indeed a distinct possibility, it wasn’t big enough to deter the decision of home buyers or make a dent in the formidable fortress of the home loan industry, which disbursed about Rs 60,000 crore in FY’05 alone and is growing at an impressive 30 per cent per annum.

There is nothing official about it just as yet, but current market feedback strongly suggests that a marginal increase of home loan interest rates by 25 to 50 points may be just around the corner. It’s the proverbial wake-up call for home loan customers as also for those dithering over their decision to take one, although it’s not expected to cause more than a ripple in a buoyant market that has clocked an impressive 30 percent growth rate in recent times.

Interestingly, this expected increase in the interest rate follows close on the heels of a similar raise (50 basis points) by big-ticket players in the last quarter of the year ended March 31, 2005.

Concurs Harsh Roongta, CEO, Apnaloan.com, “ I don’t think there is any doubt that the interest rates on home loans are heading north. The only question is when and by how much. There could be some debate as to the extent and timing of the increase. Given the overall preference that the authorities have for a stable interest rate regime, I don’t think we will see a huge jump in the interest rate at one go. Even if they do increase, the hike will be gradual. Having said that, I would expect a minimum increase of about 50 basis points over the next one year.”

Agrees Renu Sood Karnad, Executive Director, HDFC Ltd., “Interest rates in the economy have been inching up and may increase by 25-50 basis points in the short run.” Having said that, she also reveals that HDFC has no immediate plans to hike interest rates. “We have maintained our spread and at present it stands at 2.17 percent, exactly as it was in December 2004. We would look at changing the interest rates depending on how the cost of borrowing would move,” she stresses.

Reasons For The Hike
Industry stalwarts like Nitin Palany, managing director of the Chennai-based Sundaram Home Finance Ltd., and Keki Mistry, Managing Director, HDFC, have also stated that home loan interest rates have bottomed out and a nominal increase of 25-50 base points is only to be expected given the current market scenario which has witnessed an increase in deposit and refinance rates in recent months.

This follows the decision of the National Housing Bank, the country’s apex bank for housing finance, to increase its general refinance rates from 6.5 percent to 6.75 percent in late April this year for the second time since December 2004. Justifying the increase, sources in the NHB pointed out that there were several contributing factors including the rising cost of funds as banks have hiked rates on bulk deposits and certificates of deposits in their enthusiasm to ramp up deposit mobilization.

The bank’s total refinance portfolio has risen to a staggering Rs 5, 200 crore for the nine-month period between June 2004-March 2005 as compared to Rs 1, 035 crore in the corresponding period last year. Ironically enough, it’s the smaller home finance players that have largely borne the brunt of this increase, given the fact that major players like HDFC and ICICI for example, are not overtly dependent on external agencies like NHB to raise the required funds.