Friday, December 22, 2006

New Home Buyers to Escape Rate Hike

New Home Buyers to Escape Rate Hike

By Mrs Gupta, Section Real Estate
Posted on Thu Dec 21, 2006 at 03:07:19 AM EST
The hike in home loan rates will not affect new borrowers immediately as banks and finance companies find it difficult to pass it on to fresh customers at the time of slowdown in the sector. But, old customers will have to bear the brunt of higher rates as it automatically gets passed on to them.

A direct sales agent for home loan of ICICI Bank said as the number of customers seeking fresh loan has gone down, the bank is ready to give loan to a new customer at the old rate of around 9.5%. He said customers are benefitting from the competition among banks and finance companies. But, the same thing does not apply for old customers. as in their case, the hike is passed on automatically.

ICICI Bank has recently increased its rate by half a percentage point. Its new benchmark for floating rate will be 10.75%. Since November 2004, ICICI Bank hiked home loan by 3%. That means, if someone had borrowed at the lowest ever rate of 7% prior to November 2004, he would now be paying interest at 10.50%.

And if someone had borrowed at 7.25%, his rate would have gone up to 10.75% by now, which is the benchmark for floating rate. But, the new customers are being offered at around one to 1.5 percentage point discount to the bench mark rate. However, CEO of ICICI Home Finance Rajiv Sabharwal said the interest rate on home loan is between 9.50% and 10%.

The same situation prevails in other banks and finance companies. This time, ICICI Bank has taken the lead in increasing the rate as RBI’s decision to increase the cash reserve requirements to be maintained with the centeral bank affected it directly.

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Other banks and institutions are likely to follow the suit. HDFC is likely to announce its new rate in the next week, said HDFC ED Renu Karnad. She said RBI’s decision to increase cash reserve requirements with the central bank will not affect HDFC directly as it does not have to maintain any such reserve.

Interestingly, bankers are not very perturbed at the rise in interest rate and feel that it would not affect the sector. Karnad said interest rate at around 10% would not affect demand. But, if the rate goes up further, the demand would certainly get affected. Sabharwal said the present slowdown in some centres like Mumbai, Pune and NCR, is mainly because of a rise in the price of real estate. But, he said the number of transactions in areas like Nasik, Nagpur and cities in South India is growing rapidly.

He said half a percentage point rise in interest rate led to an around 5% increase in the rate, which is within the tolerable range.

But, he said, if the rates go close to 12%, certainly there would be a problem. Though the interest of banks and finance companies is protected as the value of security, which is house in these cases, have appreciated substantially. But, such a rise in the interest rate will affect the sector, senior bankers feel.

Source- TOI, Dated, December-21,2006

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