HDFC interest rate cut fuels rate war - Views on News from Equitymaster

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HDFC interest rate cut fuels rate war

Jan 7, 2002

The year 2002 has started with some good news for loan seekers. HDFC, the market leader in the domestic housing finance industry has announced rate cuts on home loans by 0.25%. The 0.25% reduction applies across the board including NRI home loans. The prime-lending rate (PLR) has been reduced to 11.5% from the existing 12%. The new rates are applicable from January 1, 2002 and will be applicable for loans that have been approved but not disbursed. Even the processing fee and administrative fee has been reduced to 1% from existing 1.8%.

The current cut in home loan rates by HDFC is a signal that the rate war that began in the domestic housing finance industry a couple of years ago is far from over. Last year home loan rates saw a downward revision virtually by all the housing finance companies in the range of 0.5% to 2.0%. These revisions were triggered by the low interest rate scenario in the economy fuelled by the Government’s decision to reduce CRR (Cash Reserve Ratio). This resulted in an inflow of over Rs 60 bn into the system.

Lets see the impact of HDFC interest rate reduction on the equated monthly installment (EMI) for loan seekers:

Assumption:
Loan amount: Rs 1,000,000.
Time: 15 years

Old New Difference
Interest (%) 12.25 12 0.25
EMI (Rs) 12,400 12,236 164
Total repayment (Rs) 2,232,000 2,202,480 29,520

The table above clearly shows that the EMI has come down by Rs 164 and the total saving over the term of the loan would be Rs 29,520.

Taking cue from the market leader, other housing finance companies that plan to announce rate cut are State Bank of India (reduced interest rate by 0.5%), HUDCO (by 0.25%), LIC Housing Finance (by 0.25%) Corporation Bank (by 0.25%) and PNB Housing Finance and the numbers are bound to increase in coming weeks. Housing finance companies are trying to woo consumers by way of lower interest rates and not willing to be left out from the competition. Earlier ICICI Home Loan has effected a rate cut and introduced floating scheme at 11.5% per annum on monthly reducing balance.

The last few years have been really great for property buyers as property prices have come down considerably, tax benefit on the repayment of home loan has increased on year to year basis and HFCs have been consistently reducing interest rate on home loans. Even the number of tailor- made loans matching individual requirements have increased.

Loan seekers its time for you to make your pick and rest assured there are a number of players in the market ready to finance your home if you have the required income level and your tax papers are in place.


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