India’s banking system is under tremendous pressure -- total outstanding on mortgages in the banking system stood at Rs 9.08 lakh crore as of September 29. But, this has been no deterrent in financial institutions giving one another stiff competition while offering the best rates to home loan borrowers.
In early November, State Bank of India announced its plans to offer the cheapest home loans by implementing a five-basis point reduction in margin cost based lending rate (MCLR rates). The country’s largest lender bought down the rate to 8.30 percent. Soon after, Bank of Baroda launched a scheme to offer home loans at 8.30 percent interest to its best-rated customers.
Previous trends show this magnanimity shown by state-run banks may prod private competitors to hop on the bandwagon. Earlier this year, private lenders such as HDFC, ICICI Bank, and Axis Bank brought down their home loan interest rates to 8.35 percent -- that was in response to SBI bringing rates to 8.35 percent by implementing a 25-basis-point cut.
Financial institutions are doing everything it takes to attract fence-sitters, it appears. The government, too, is not far behind.
Getting more affordable
Recently, the central government decided to increase the carpet area of homes meant for the middle-income group (MIG) category under the Pradhan Mantri Awas Yojana-Urban. Under the MIG-I category, the carpet area of the houses has been enhanced from 90 square meters (sqmt) to 120 sqmt while the carpet area has been increased to 150 sqmt from the current 110 sqmt for the MIG-II segment. This means borrowers buying a home under the Pradhan Mantri Awas Yojana-Urban scheme would be able to buy bigger houses by paying the same interest on their home loans.
Borrowers who earn an annual income of Rs 6-12 lakh and apply for a loan of up to Rs 9 lakh fall under the MIG-I category and borrowers who earn an annual income of Rs 12-18 lakh and apply for a loan of up to Rs 12 lakh are under the MIG-II category. It’s worth noting that these categories of borrowers are eligible for 3-4 percent of subsidy on interest rate which further brings down the borrowing cost.
Why now is the time to borrow?
This seems like a perfect time to make the first-time homebuyer to make their move. Interest rates may not go any lower from here on. In fact, there might be an upwards movement in the second half of this financial year as the pressure on the banking system grows.
Now, the question is, is it only the first-time borrowers that will get the benefit of all this rate reduction? What about the existing borrowers? Fret not, you can get your loans restructured or refinanced to make the most of this opportunity. It is, however, with a great deal of calculation that you must perform the task.
Make sure that the switching process, which would involve payments of certain kinds (processing and administration fee, etc.), does not act a killjoy. It would be the best if you could stick with your existing lender and get the loan restructured there itself. That would help you avoid do the paperwork, too. In case you must go to a new lender, it should be only after doing all your math and making sure that you will benefit monetarily at the end of it all.
It is also important to note that both principal and interest payments are eligible for certain tax benefits which needs to be evaluated basis individual tax positions.