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No cheer for existing home loan borrowers

Posted by Manish Agrawal on Monday, 15 December, 2008

Existing borrowers will not benefit from the special home loan schemes to be unveiled by state-owned banks as part of the government’s  stimulus package. The reduced loan rates will only be applicable to fresh home purchases. The scheme is likely to be announced by the Indian Bank Association (IBA) on Monday.
Under the package, housing loans up to Rs 5 lakh will be priced at 8.50% and borrowers in the Rs 5 lakh-Rs 20 lakh category will have to pay 9.25% interest. The interest rates across all price segments currently exceed 10%. The special package will also offer a free loan insurance cover, waiver of pre-payment penalty and lower margins. 

Banks are likely to accept a margin of 10% for a Rs 5 lakh loan and 15% for a Rs 20 lakh loan. A borrower will have to pay 10% of the purchase value upfront for a Rs 5-lakh loan and 15% in case of a Rs 20 lakh loan. The package is aimed at boosting growth, and will therefore be available only for new home purchases and not for refinancing existing borrowers, according to a banker involved in working out the details. HDFC and ICICI Bank are the major players in the home loan market. But the special package will only be offered by PSU banks, as per government directives. 
State-owned banks have substantially reduced their lending rates due to a dip in cash reserve ratio from 9% to 5.5% in the past two months. 

Most private banks continue to charge higher interest rates than their PSU counterparts . For instance, ICICI Bank’s Prime Lending Rate (PLR) stands at 17.25% and has remained unchanged since August this year. On the other hand, State Bank of India’s PLR is at 13%. Borrowers of other private banks are paying 12-13 % interest. 

Bankers reckon the special loan package will be successful in tier-II and tier-III cities, where homes cost less than Rs 20 lakh. In Mumbai, apartments in the sub-Rs 20 lakh category are only available in the distant suburbs. Interestingly, the special offer will see the revival of low-cost , fixed-rate loans. In recent years, lenders discouraged fixed loans by imposing exorbitant interest rates vis-a-vis floating loans.

Source: http://economictimes.indiatimes.com/No_cheer_for_existing_home_loan_borrowers_/articleshow/3837804.cms

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