Home loan borrowers are typically in for the long run. Loans are available in tenures of decades providing borrowers ample time to repay the loan EMI. These loans are available in both fixed and floating rates, where floating rates denote dynamic interest rates that vary according to base rates decided by the apex bank in regular policy reviews. Fixed rate home loans are to be repaid at the per-decided interest rate irrespective of market dynamics.
Despite two base rate cuts since January this year, Indian banks have been reluctant to reduce their lending rates to put it mildly. The major banks in the country had to eventually be strong-armed to reduce rates by Raghuram Rajan, the governor of Reserve Bank of India (RBI).
Their excuse – even with the rate cuts by the RBI, the overall cost of funds for banks has remained at similar levels as before the rate cuts, making rate cuts for customers a potential loss-making scenario for banks. The RBI and the Finance Ministry categorically rubbished these claims before the major banks ultimately slashed their base lending rates to customers.
So, are home loans cheaper now?
Only after the major banks caved in to slashed rates, their smaller and mid-size counterparts followed suit. Moreover, banks have been actively advertising the compulsory lending rate cuts as concessions to existing borrowers. On a closer look, it can be seen that new borrowers are receiving low interest rates compared to existing customers.
If you take a look at historical data on home loan rates from 2011 onwards, you will see that rates have more or less remained the same for new borrowers. In fact, existing borrowers have had to pay higher rates at almost 11% in April 2015 as compared to figures from January 2011. The lenders have not been completely fair to borrowers in the past in terms of providing the benefits of revised rates.
In fact, a home loan borrower from the public sector State Bank of India in 2011 is at a slight disadvantage in terms of EMI when compared with borrowers who took loans from private sector lenders. And this is the scenario for the top lenders, the smaller lenders have been even more stringent is passing on benefits to customers.
A consolation here is that banks have been brought down to spreads between 0.05% and 0.15%, which in turn provides them with little leeway while differentiating among existing and new borrowers going forward. Meanwhile, housing development companies such as LIC HFL and HDFC are exempt from changes in the base rate regime. As such, they do not have any limitations of spread while offering attractive rates to customers. A similar ‘unfairness’ survey if done in 2018 may show the housing finance companies as demanding unfair EMIs.
We can all hope that this sort of competition does not become a trend in the Indian banking sector, and the regulatory bodies step in to make the lending environment fairer to all borrowers.