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Dewan housing slashes interest rates - Views on News from Equitymaster
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  • Oct 25, 2000

    Dewan housing slashes interest rates

    Dewan Housing Finance Corporation (DHFL) has slashed the interest rates on housing loan to 13.25% in the range of Rs 25,000 to Rs 25,00,000.

    This new rates of interest are valid for a loan tenure of 7 to 15 years. DHFL has also extended the maximum period for their loans to 20 years from the existing limit of 15 years. It now offers housing loan for the period from 16 to 20 years also. But the rate of interest in this range is a little higher and pegged at 13.5%. The interest rate for loans up to Rs 25,000 remains unchanged for the period 7 to 15 years. However, for the period 16-20 years the interest rate would be 12.25%.

    The table below indicates the new interest rate slab for DHFL

    Slab (Rs) Interest (old)% Interest (New) %
    7,500 to 25,000 12 12
    25,001 to 1,000,000 14 13.25
    1,000,001 to 2,500,000 16 13.25

    The table clearly indicates that the maximum reduction in the interest is for the slab of Rs 1,000,000 to Rs 2,500,000, that is a reduction of 2.75% followed by Rs 25,000 to Rs1,000,000 slab, which has seen a reduction of 0.75%.

    The revision of the interest rates would mean that the consumers would now be eligible for higher loan amount with the same level of income. Even the EMI (equated monthly installment) value would decline, as it’s a function of interest rate.

    Lets see what would be the impact of these reductions on the consumer’s loan repayment:

    EMI and Interest rate comparison for a loan of Rs 100,000 for 15 years.

      Old New Difference
    Interest % 16 13.25 2.75
    EMI (Rs) 1,495 1,306 189

    The table above indicates that the reduction in interest rate by 2.75% would result in monthly saving of Rs 189 per Rs 100,000 on a 15 year loan. This is a substantial amount considering the fact that the housing loans are generally of high value. For instance, the loan of Rs 1,000,000 for 15 years would result in a saving of Rs 1,890 per month, which in turn results in saving of Rs 340,200 over the term of the loan. This saving amounts to about 2.9% of the loan amount (Rs 1,000,000).

    With the reduction of interest rates on housing loan, DHFL’s offering has become more competitive and in line with interest rates prevailing in the market. The current interest rate structure of DHFL is at par with ICICI, but still higher than the market leaders HDFC and LIC Housing Finance which offer housing loan at 13% in this particular category.

    The reduced interest rate gives an opportunity to the existing customers to shift their higher interest rate debt to low interest rate debt, as there is no prepayment charge in case of DHFL. However, this won’t be an easy task and would require some effort to convince housing finance companies about debt shifting. This is a relatively new concept in the country and will take some time to find acceptability among HFCs.



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