In a rising regime, home financiers cut loan rates to sustain demand momentum

In a rising interest rate regime, large housing financiers have cut home loan rates in order to sustain the demand momentum which is being impacted by rising prices of real estate, higher cost of borrowing and inflationary pressures.

Since mid-October, lenders such as Housing Development Finance Corporation, State Bank of India, Bank of Baroda and Bank of Maharashtra have cut the rates on their home loans by 15-30 basis points (bps), following the latest 50 bps hike in the repo rate to 5.9 per cent.

The special rates are being offered as a part of special festival season offers only to high-quality borrowers with good credit scores, to support the robust demand for housing loans by maintaining affordability during the peak season of home ownership, according to these lenders.

Most have also waived processing fees on new home loans, balance transfers, and are offering special offers for women and specific customer segments, and additional discounts based on the credit score of the borrowers.

Sustaining demand

While the festival season offers are normally an annual affair, this time the rate cuts come even as housing loans have remained one of the leading drivers of credit growth despite the rising rates. As per latest RBI data, bank home loans had registered a growth of 16 per cent on-year as on September 23.

However, analysts suggest that the contrarian rate cuts are also to remain competitve in an aggressive home loan market, and to support the appetite for home ownership which has started being hit by the trifecta of rising interest rates, higher mortgage prices and inflationary pressures.

“Demand has continued but it may not sustain because the cumulative 190 bps increase in the repo has started to impact affordability for the customer. In October, there was a 15-20 per cent drop in home loan inquiries, so demand has already started reducing and may reduce further,” said HT Solanki, General Manager of mortgages and other retail assets at Bank of Baroda.

“By offering a very competitive rate of 8.25 per cent , home loans will be more affordable and will help increase or sustain the demand in home loans,” Solanki added.

Limited headroom

In addition, the offers are also being introduced to stagger the transmission of higher interest rates as consumer loans are linked to an external benchmark or the repo rate —which has risen by 190 bps since May, bankers said.

The traditional argument is that the impact of rate hikes is minimal on home loans owing to their longer tenure due to which borrowers go through multiple rate cycles and any hikes get adjusted in the tenure of the loan instead of the EMI (equated monthly installment).

Rating agency ICRA, in a recent report, however said that due to the successive rate hikes, lenders have limited headroom to increase loan tenures because of which EMIs are likely to rise by 12-21 per cent for prime home loans and 8-13 per cent for affordable home loans while maintaining the original tenure.


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