Home loan rates: Just grin and bear!

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V.K. Kumar looks glum and unhappy while discussing housing loan rate hikes announced by banks. He says, "I have seen three rate hikes over the past six months and I am paying 9 per cent now. Once my EMI was increased, while the other two times, the tenure of the loan was increased by about one year each time." His frustration with increasing payments and widening maturities is palpable. "It's like running to stay in the same place," he says.

So the obvious question - why didn't he lock himself up at fixed rates earlier? "I fell for their hard sell. Their marketing pitch was that rates had only been coming down and there was no hint of their going up. Besides, the fixed rates were about 1.25 per cent higher than the floating rate. I didn't want to pay about Rs 3,500 more per month on my big loan."

That's a sentiment that many of us can identify with. Home loan rates seemed headed only southwards until recently. Floating loan rates were the norm with almost 85 per cent of the loans disbursed in that category. Only a few savvy borrowers thought it prudent to lock into on a fixed rate a year or two ago. They are sitting pretty now. With some prodding, some allow for just a bit of self-congratulation. Says Mr R. Vasan, finance professional, "I locked myself into a fixed rate of 7.5 per cent in 2004. These hikes make no difference to me as a borrower. If I had not done that I might be paying about 3 percentage points more or about Rs 2,000 more per month now. I am patting myself on the back."

For those not that lucky, what are the options? No 1. Just grin and bear it. Remind yourself that home loan rates were at about 14 per cent five years ago. No 2. Consider repaying a part of the loan ahead of schedule after taking into account prepayment charges.

"I am considering prepaying a part of my home loan. My tax saving investments give me a return of 8 per cent, while I am paying 9.25 per cent interest on my home loan currently," says Mr Raj Narsimhachari, a savvy home loan borrower.

If more borrowers displayed similar alacrity, banks may be in for a surprise. Over the past three years, banks have pumped in more than Rs 1 lakh crore to home loan borrowers. Housing loans from banks have risen at a rate of about 45 per cent annually, from about Rs 90,000 crore in March 2004 to about Rs 2,00,000 crore currently.

A one percentage point increase in home loan interest rates (that has taken place over the past six months), will fetch these banks an extra Rs 2,000 crore in income.

The next hike of 0.25 percentage point to 0.50 percentage point will probably be kept in abeyance in the light of the Finance Ministry directive to seek board approval.

Taken from Business Line

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