MUMBAI: A large number of home loan customers with floating rates are in for some tough times ahead, with major banks and housing finance companies (HFCs) raising mortgage rates.
Over the last two years, interest on home loans has gone up by at least 200 basis points (100 basis points = 1%), from about 8% to above 10% for even the best-rated customers. That is a hike of about 25%. In some cases, industry experts said, such hikes could well have taken the tenure of home loans to beyond 20 years. This in turn raises the possibility of banks and HFCs now asking some customers to partpay the principal amount of home loans.
On Tuesday, State Bank of India, the country's largest bank, raised both its deposit and lending rates, taking its effective home loan rate to 10.25%. Last week, ICICI Bank, the second largest bank, raised its rates. HDFC Bank and HDFC are both expected to follow soon.
After the latest round of rate hikes, SBI's home loan customers would pay 100 basis points (bps) above its base rate of 9.25%; thus the effective rate becomes 10.25%. "With the banking leader in double digits, others will have to be above this level," an official with an HFC said.
Now consider a situation where a 40-year-old home loan customer had taken a loan about 2-3 years ago. As rates go up, banks usually increase the number of EMIs, rather than the amount of the EMI. If in this case, the number of EMIs go beyond 240 (that is 12 EMIs for each of 20 years), the customer will have to continue paying beyond his retirement age. In such a situation, the bank or the HFC, would "call and counsel" the customer and give him two options: Either increase the EMI so that the its number comes down to below 240, or pay a lumpsum which would reduce the borrower's outstanding principal amount and leave the EMI amount unchanged. "Increasing the EMI is best option, but at times, looking at the customer's financial position, we ask for some one-time part-payment of principal," official at a housing finance company said.
A back of the envelope calculation shows that home loan rates have increased by about 25% over the last few years, that is from about 8% to above 10% now.
On Tuesday, in addition to raising its base rate by 75 basis points to 9.25%, SBI also raised its fixed deposit rates by as much as 225 basis points (100 basis points=1%), all of which were in maturities of up to six months. The bank also raised its prime lending rate (PLR) by 75 bps to 14% now. All these hikes are effective Thursday.
The hike in FD rates is sure to cheer those who prefer the safety of bank FDs. From May 12, SBI will pay at the rate of 6.25%.
Over the last two years, interest on home loans has gone up by at least 200 basis points (100 basis points = 1%), from about 8% to above 10% for even the best-rated customers. That is a hike of about 25%. In some cases, industry experts said, such hikes could well have taken the tenure of home loans to beyond 20 years. This in turn raises the possibility of banks and HFCs now asking some customers to partpay the principal amount of home loans.
On Tuesday, State Bank of India, the country's largest bank, raised both its deposit and lending rates, taking its effective home loan rate to 10.25%. Last week, ICICI Bank, the second largest bank, raised its rates. HDFC Bank and HDFC are both expected to follow soon.
After the latest round of rate hikes, SBI's home loan customers would pay 100 basis points (bps) above its base rate of 9.25%; thus the effective rate becomes 10.25%. "With the banking leader in double digits, others will have to be above this level," an official with an HFC said.
Now consider a situation where a 40-year-old home loan customer had taken a loan about 2-3 years ago. As rates go up, banks usually increase the number of EMIs, rather than the amount of the EMI. If in this case, the number of EMIs go beyond 240 (that is 12 EMIs for each of 20 years), the customer will have to continue paying beyond his retirement age. In such a situation, the bank or the HFC, would "call and counsel" the customer and give him two options: Either increase the EMI so that the its number comes down to below 240, or pay a lumpsum which would reduce the borrower's outstanding principal amount and leave the EMI amount unchanged. "Increasing the EMI is best option, but at times, looking at the customer's financial position, we ask for some one-time part-payment of principal," official at a housing finance company said.
A back of the envelope calculation shows that home loan rates have increased by about 25% over the last few years, that is from about 8% to above 10% now.
On Tuesday, in addition to raising its base rate by 75 basis points to 9.25%, SBI also raised its fixed deposit rates by as much as 225 basis points (100 basis points=1%), all of which were in maturities of up to six months. The bank also raised its prime lending rate (PLR) by 75 bps to 14% now. All these hikes are effective Thursday.
The hike in FD rates is sure to cheer those who prefer the safety of bank FDs. From May 12, SBI will pay at the rate of 6.25%.
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