Low rate home loans will disappear soon

12 Feb 2010 03:42 AM

Mumbai: Ultra-cheap housing loans are soon going to be a thing
of the past. Banks are winding down their fixed-cum-floating
rate home loan schemes, where rates were in the 8-8.5% plus
range for the initial year, with the provision that rates may be raised later.

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Axis Bank has already withdrawn its fixed-cum-floating
rate loan and Union Bank of India told DNA that it was
withdrawing its teaser loan scheme starting February 15.
“We will be offering floating rates of interest starting February 15,” said a bank official.

Housing Development Finance Corporation (HDFC)
has said that its scheme is available till February 13.
Will the scheme, where the interest rate is 8.25% initially
(and then converted to floating) be extended? Keki Mistry,
chief executive officer of HDFC, said no decision had been
made as yet. “Basically the product is a function of how we
are able to raise (cheap) money.
It will be decided closer to the date,” Mistry said.

Other teaser home loan schemes,
including that of the State Bank of India,
are expected to be reviewed shortly.
State Bank chairman OP Bhatt has already
gone on record to say that he expects rates
to rise after April.

Industry experts feel there is a need to put a brake
on these fixed-cum-floating rate schemes due to
the changing interest rate scenario. RR Nair,
chairman of LIC Housing Finance, says:
“These schemes need to be stopped now.
It is not a right business tactic. Any discount
of more than 50 basis points (0.5%) on a
promotional basis is not good. This means your
existing customers are paying much more then
the new customers. You are creating a different class of customers.”

He also voiced concerns over the period of current teaser loans,
where the fixed rate ends and the floating rate starts after the initial
year of the home loan. “After the one-year period, will the
customer be able to afford the loan if the EMI goes up by 35%.
It is a concern for both customers and the institution (home loan provider).
Bad loans too can rise,” Nair said.

Signalling that interest rates on loans would rise,
IDBI Bank on Wednesday announced a rise in fixed
deposit rates by 0.25% for varying periods between
six months and 1,100 days. The bank now offers 6.75% on
a one year-500 day deposit, rather than 6.50% earlier.

On 500-day deposits, one can get 7%.