Mumbai: Kirti, who runs an embroidery boutique in a Mumbai suburb and prefers to be identified by only her first name, rushed to her bank on Friday to prepay a large part of her home loan before another round of lending-rate hikes makes it more of a burden.
Affordability factor: The days of cheap credit, including home loans, have ended as RBI makes the war against inflation its top priority. Photograph: Rajeev Dabral / Mint
She had taken a 20-year, Rs30 lakh home loan from a private sector bank at a floating rate of 7.5% in 2003, which has jumped to 12% now. The loan cost her half a percentage point less because she is one of the lender’s private-banking customers, who normally maintain large deposits and get credit at a discount.
“I am sure in July there will be another round of rate hikes in home loans. It’s better to bring down my liability,” said Kirti, who paid Rs7.5 lakh ahead of time on Friday.
The days of easy and cheap credit have ended as RBI makes the war against inflation its top priority.
It wasn’t the first time Kirti had prepaid part of the loan. In February 2006, when the bank raised its home loan rate to 8.50%, the tenure of her loan stretched to 334 months. She paid Rs15 lakh and brought it down to 269 months.
Kirti is lucky because her business is doing well and she has the money to pay large parts of of the loan early. But not every home-loan customer is as fortunate. Whenever banks increase their interest rates, they prolong the customers’ loan tenure rather than increase the equated monthly instalment (EMI) to avoid extra paperwork, as they usually take post-dated cheques from customers. When the rates go up substantially, they raise the EMI too.
Interest rate combo
HDFC Ltd joint managing director Renu Sud Karnad has some good news — and advice — for home-loan customers. She does not expect interest rates to move sharply now and suggests that home-loan seekers borrow at least a part of it on floating rates.
The gap between floating-rate and fixed-rate loans offered by HDFC, India’s oldest mortgage lender, is between 250 and 300 basis points. One basis point is one-hundredth of a percentage point.
“Those customers who are risk-averse could look to divide the loan into two components — partly in fixed and partly in floating rate of interest,” she says.
In such a loan, a customer benefits two ways. The pure fixed-rate portion of the loan helps in hedging against rising interest rates. The customer’s loan burden will decline on the floating-rate part when the interest rate falls. “The floating rate part also gives the customer the flexibility to repay that portion of the loan in case the interest rate moves up, generally without any prepayment charges,” says Karnad.
Car buyers stung
Car buyers planning purchases with bank loans should also be prepared to pay more.
“The interest on car loans is likely to go up to 14-14.5% most probably effective 1 July,” says an executive with a leading bank who asked not to be named because he is not authorized to talk to the media.
Interest on car loans now is 13%, up from about 9% in 2005-06, according to this executive. To put things in perspective, the EMI on a Rs5 lakh car for a three-year loan, with 90% bank financing, was Rs14,200 two years ago. Today, the EMI for the same loan is Rs15,000.
Car dealers and vehicle financiers say that because the rise in EMIs is not huge, higher rates will not affect car sales in a big way.
Indeed, it is not higher rates but a lack of credit availability that is hurting sales of cars and bikes. Lenders finance up to 75% of a car’s cost now, compared with 90% two years ago.
Vehicle manufacturers such as Tata Motors Ltd, the country’s largest car maker by revenue, and Bajaj Auto Ltd, the No. 2 bike maker, have in the past blamed the “sudden contraction in vehicle finance” for lower sales.
Interest rates on two-wheeler finance have almost doubled to 21-23% in the last two years. Customers are finding it difficult to get unsecured loans because of rising defaults and the increasing cost of funds.
Ammar Master contributed to this story.