State Bank of India has launched two special home loan schemes that assure low interest rates in the first three years, upping the ante for its rivals in the mortgage market that has turned bullish following a pick-up in home sales in May.
SBI Easy Loan for amounts up to Rs 30 lakh and SBI Advantage Home Loan for amounts above Rs 30 lakh will carry the special rate of 8%, introduced in February. The country’s largest bank has gone a step further by introducing special rates for second and third years in a move that could spark a rate war in the highly-competitive home loan market.
Under SBI Easy, interest rate for the second and third years is fixed at 9%. From the fourth year onwards, the customer can choose between a floating rate 2% below State Bank Advance Rate (SBAR) and a fixed rate 1% below SBAR with a five year reset. SBAR is the bank’s benchmark rate to which all floating rate loans are pegged.
Under SBI advantage, the interest rate is fixed at 9.5% for second and third years. From the fourth year onwards, the customer can choose between a floating rate 1% below SBAR and a fixed rate 0.5% below SBAR with a five-year reset.
Mortgage market leader HDFC and ICICI Bank charge 9.25% for loans up to Rs 30 lakh. For loans above Rs 30 lakh, HDFC charges 9.75% and ICICI charges between 10% and 11%. HDFC said it would review its rates after the Union budget, which will be presented on July 6. ICICI Bank said it had cut rates in line with the movement of systemic rates and deposit costs since December 2008.
The intensity of the competition between SBI and HDFC is evident from the claims and the counter claims made by both sides on the superiority of their products.
“Even if the borrower gets a better deal in the first three years, his payment over the remaining tenure of the loan will be lower under an HDFC loan,” said Renu Sud Karnad, joint managing director, HDFC.
The institution’s chairman Deepak Parekh had recently hinted at the possibility of lending rates coming down if there is a decline in cost of funds. According to Ms Karnad, there has been a remarkable pick-up in home sales. “We are seeing this because of a real reduction in property prices. Builders such as Unitech and Lodha have brought down rates in Delhi and Mumbai and are seeing growth in sales,” she said, adding that the pick-up in sales has resulted in an increase in prices.
An SBI official echoed this view. “There is a definite pick-up in home purchases partly driven by a fall in cost of loans and real fall in property prices. There are pockets where the resurgence is so good that property prices have started picking up,” she said, requesting anonymity. She added that rates have bottomed out, and there is a possibility of them going up marginally in the medium term.
SBI has lent up to Rs 7,171 crore till the end of May under the special scheme that offers loans at 8% for the first year. This is a sizeable number, considering that disbursements during the whole of FY09 was Rs 9,372 crore. SBI has a home loan portfolio of over Rs 56,000 crore. “There is concern among borrowers that a rise in rates will increase their liabilities. We are telling them that their EMIs are frozen for the next 36 months,” the SBI official said.