Buy a home: Shopping for housing finance turns cheap

Atmadip Ray

As far as housing finance goes, it is literally in-your-face money. And housing loans have become more attractive than ever with housing finance companies (HFCs) falling over one another by offering attractive schemes at finely-priced rates.

While, the Housing Development Finance Corporation (HDFC) was the first to slash rates, others like arch rival ICICI Home Finance and PNB Housing Finance took little time to react and follow suit. The likes of Tata Home Finance, LIC Housing Finance and Sundaram Home Finance also joined the rate-war bandwagon in the last week of October. Banks like Corporation Bank and State Bank of India have also followed suit by reducing rates to woo their retail customers. At the apex level, the National Housing Bank (NHB), also lowered its refinance rates by 50 bps for direct housing loans disbursed by primary lenders in rural and urban areas.

The stage has now been set to catalyse higher demand for housing loans. As ICICI Home Finance’s managing director Madhabi Puri Buch put it: “We hope that by bringing interest rates to such attractive levels, we will be able to help many more prospective customers take a home purchase decision.”

Noted HDFC’s executive director, Renu Karnad: “The housing industry is now stable and we do not see the prices going up in near future... hence we think this is the right time for people to buy their own house.”

But what might have prompted the HFCs and banks to reduce their rates at this point of time? The rationale behind this is straightforward: the overall interest rate structure in the economy has been coming down — yields in the government securities are hovering around at their all-time lows; bank deposit rates have come down considerably. “Companies which deal in the retail segment of the market have to align their lending rates with the overall interest rate scenario,” opines Ms Buch.

Before the current revisions, most of the HFCs had last reviewed their rates in March 2001. “We always do periodic review of interest rates, and we felt that the current interest rates are sustainable at their low levels,” Ms Buch says while adding: “These reductions are basically to pass on the benefits of soft rates to our customers.” The decisions could have come much before the month of October. Some like ICICI Home Finance had decided to reduce its rates much before October 17, when it actually announced the rate cut.
However, the September 11 episode, which caused turmoil and made the market volatile, delayed the decision.

HDFC reduced its lending rate by 25 basis points (bps) for its fixed rate loans and 50 bps for its floating-rate loans. HDFC’s retail prime lending rate has also been reduced by 50 bps to 12 per cent from 12.5 per cent. There was also a corresponding cut in HDFC’s deposit rates. ICICI Home Finance reduced its lending rates by 25 bps across various maturities, while PNB Housing Finance, the wholly-owned subsidiary of the Punjab National Bank (PNB), lowered its rates by 25 to 50 bps for different slabs. Tax-breaks make the availing of housing loans all the more attractive. With income-tax benefits added to the loan, the actual interest rate could actually be seen at as low as 8.5 per cent per annum. The new home loan rates also offer an opportunity of even tighter savings for people holding high cost loans that they may have taken over the last four to five years.

HDFC has also announced a special discount of 1 per cent on processing and administration fees for housing loans upto November 17. ICICI Home Finance waived both the prepayment charges of the old loan and processing fee for the new loan upto November 20.
The housing industry has a potential of attracting Rs 3,00,000 crore by way of investments. The current lending rates would help reaching the target as demand is expected to shore up. PNB Housing Finance Ltd’s managing director R Nambirajan: “It is the best time for a customer to avail of housing loan as the benefits are manifold in the form of low property prices, tax benefits and the lowest ever interest rates.”

However, HFCs have been facing difficulties of narrow interest-rate spreads, and find it tough to compete with the commercial banks, which have not only been enjoying higher spreads, but also mobilising cheaper resources to fund long-term housing finances. With the latest revision, the spreads are going to affect more than ever. However, this time, NHB intends to provide some breather to the HFCs and lowered the refinance rates by 50 bps to 10.25 per cent.
This is the second time in the recent past that the NHB has lowered its refinance rate. It had done so earlier, effective from September 1, 2001. Lending rates in housing industry hovers between 10.50 per cent and 13.00 per cent across various maturities.

With this southward sojourn of the housing rates, the market is expectedly on the verge of a steady growth. There is also no dearth of support from the Centre, which has been proactively supporting the housing industry over the past few years and encouraging individual home ownership by providing various fiscal incentives in successive Union budgets. The Centre introduced a 20 per cent tax rebate under Section 88 of the Income-tax Act, which would now be available for repayment of housing loans up to Rs 20,000 per year as against Rs 10,000 earlier.

The Ninth Plan Working Group on Housing has estimated the investment requirement for housing in urban areas at Rs 52,600 crore. It is also estimated that by 2010 and with the current rate of population growth, there would be an annual requirement of 2.5 million to 3 million additional dwelling constructions on average. The country continues to face an acute shortage of housing units. Based on the latest census, the housing shortage is estimated at 19.4 million units in 2001. This indicates tremendous scope for the housing finance players. The challenge for them is now to ensure that sufficient resources are channelised into the sector.