SBI improves its home loan offer

With real estate prices dropping, action is hotting up in the home loan market. State Bank of India (SBI), the country’s largest lender, today said that it had improved upon its home loan scheme and would offer home loans starting at 8 per cent in the first year before rising 100-150 basis points in the second and third years. Earlier, SBI had only fixed interest rates during the first year of the tenure of the loan.

In addition, the bank has offered to levy interest on a reducing balance basis and has waived the processing fee for home loans taken up to September.

Within a few hours of SBI’s announcement, LIC Housing Finance, the country’s second-largest mortgage company, said it was reducing the interest rate on floating rate loans for existing customers by 50 basis points.

The largest mortgage player HDFC has not announced a counter-strategy yet, and said it would lower lending rates if the cost of funds went down. For the moment, the home finance company said its effective rate was lower than what SBI was offering.

SBI, which became the largest home loan originator in 2008-09, said it had floated two schemes — Easy Home Loan and Advantage Home Loan.

Under Easy Home Loan, for those borrowing under Rs 30 lakh, the rate has been fixed at 8 per cent during the first year and would be increased 100 basis points to 9 per cent and fixed at that level during the second and third years.

From the fourth year onwards, the customer could choose between the floating rate option, for which the rate is 200 basis points below the State Bank Advance Rate (SBAR), and fixed rate which is 100 basis points below SBAR, with a five-year reset. At present, SBAR is at 11.75 per cent.

For a 20-year loan, the Equated Monthly Installment (EMI) during the first year would be Rs 836 per lakh and would rise to Rs 898 per lakh over the next two years.

Under SBI Advantage, targeted at upper-end home buyers, during the first year, the rate has been fixed at 8 per cent. It would then be fixed at 9.5 per cent during the second and third years. From the fourth year onwards, the customer can choose between a floating rate at 100 basis points below the SBAR and a fixed rate of 50 basis points below SBAR, with a five-year reset.

For a 20-year mortgage, the indicative EMI for the first year would be Rs 836 per lakh in the first year and would rise to Rs 929 per lakh over the next two years.

SBI said that the reduction in SBAR, announced last week and effective from tomorrow, would lower the effective floating rates for existing borrowers 50 basis points.

According to HDFC’s calculations, for those borrowing up to Rs 30 lakh from SBI, the effective rate worked out to 9.35 per cent a year, while for the mortgage player, the rate was 9.25 per cent.

Similarly, for those borrowing over Rs 30 lakh, the effective rate for SBI worked out to 10.09 per cent a year, while it was 9.75 per cent for HDFC.