This week on 30 minutes to wealth, we are asking some hard questions: Why are banks not reducing home loan rates on existing home loans? Repo rates are down – they have been almost to the lowest level in the last 5 years, and yet many of you continue to pay high interests and EMIs. So, what's the way out?
Banks are quick to raise loan rates, but very slow to drop them. We should be at 7.5 to 8 per cent today; why aren’t we there yet?
How many of you are still paying interest on your home loans of higher than 10.5 per cent? Chances are that a majority of you, if you opted for a floating home loan before 2008, some of you perhaps were lucky enough to get in at rates as low as 7.5 per cent in mid 2004. But now you don’t feel lucky anymore, do you? Either your EMI is up at least 50 per cent, making your saving targets go haywire, or you have been told by the bank that you have to keep repaying till way past the age of 60. Throwing out of the window all your good intentions of being debt free before you retire. The big question we're asking today, why are home loan rates taking so long to come down? Why are YOU still asked to pay so much?
Why are Home Loans still so expensive?
Because banks have not blinked yet. We'll prove that rates have to fall in the next 6 months.
# Loan rates are linked to cost of funds
# This is indirectly linked to the repo rate of the RBI - the rate at which RBI lends to banks
# So a lower repo finally translates into a lower home loan rate
Let’s look at the difference between the two rates in the past few years:
# 5 years ago in March 2003 repo rates were around 7 per cent. Home loans were 9.75 per cent; a differential of less than 3 percentage point.
# In 2004 repo rates came down 6.00 per cent (April 2004). Banks had brought home loan rates down to 7.5 per cent; now the difference is just 1.5 percentage point.
# A year later in 2005 repo rose to 7.75 per cent. Home loan rates increased to 10.50 per cent; a less than 3 percentage point divergence.
# Now the gap begins to grow. In July 2008 repo was 8.50 per cent. Home loans climbed to 11.50 per cent; the difference is now 3 percentage point.
# By December 2008, after several rate cuts, repo was at 6.50 per cent. Home loan rates stayed at 11.50 per cent. Here the gap is 5 percentage point.
# And with the most recent cut, repo are now at 5.50 per cent and some banks have had the grace to cut home loan rates to 10.5 per cent for existing clients. The difference is still 5 percentage point.
So now, either repo will rise or home loan rates will fall. With inflation slated for 2 per cent in 2009, and liquidity still an issue, repo will stay here or go lower. So we are looking at a 2-3 percentage point drop in home loan rates.
So we are definitely looking at a home loan rate cut. Why is it not happening?
I would say that the RBI needs to lean a bit more heavily on bank. Benchmark rate needs to be transparent; the only 3rd party products by ING and Kotak were pulled out of the market. ING used the Mibor and Kotak its own bank FD rate.
Let’s take a look at how stingy banks have been in cutting rates. Amongst the banks with the largest benchmark rate cuts, are:
# UCO Bank has cut rates for existing loans by 1 per cent
# BoB, SBI, Canara Bank, LIC Housing finance: are down by 0.75 per cent
# PNB, HDFC, ICICI Bank have cut them by 0.50 per cent
But does this mean these are the cheapest loans now? Not at all. In fact many of these banks were already charging interest rates as high as 13 per cent and more at the peak. Which are these banks? Really, it is important for you to know whether you are stuck in some of the most expensive home loans in loan town.
# For loans above 20 lakh for 20 years, HSBC tops the chart charging as high as 13-16 per cent for existing customers.
# J&K bank charges 14.75 per cent. Wow! that's almost 9 per cent higher than the current cost of their borrowing from Reserve Bank.
# ICICI Bank is still at 12.50 per cent.
# Punjab and Sindh Bank is at 12-12.0 per cent
# Andhra Bank at 11.75 per cent
# Federal Bank between 11.50 per cent to 12.0 per cent
We're saying, switch your bank. If you're still sitting at a loan higher than 10.5 per cent it’s worth examining the merits of a switch. Where can you switch to? Here's a list of the cheapest home loan rates.
Floater of more than Rs 20 lakh for 20 years:
The Cheapest
Bank of Baroda: 9 per cent - 9.75 per cent
Canara Bank: 9.25 per cent - 10 per cent
Bank of India, PNB: 10.25 per cent
Allahabad Bank: 10.50 per cent
SBI: 10.75 per cent
Indian Bank: 10.5 per cent - 11 per cent
Amongst these we have spoken to 5 banks which are willing to refinance home loans.
5 PSU banks that are ready to refinance loans. They are:
# Bank of Baroda
# Canara Bank
# Punjab National Bank
# State Bank of India
# Union Bank of India
It is quite funny the way banks quietly raised rates in the last three years. The only way we'd find out was when the bank would suddenly tell us that now we were indebted to the bank for ever, our tenure was perpetuity. But when they cut rates, it makes it to press releases and TV news.
There is no reason for you to be in an expensive loan, you can switch.
Cost of refinance
# Bank of Baroda: 0.10 per cent of the loan or a maximum charge of Rs 5,000
# SBI, Canara Bank: 0.50 per cent of the loan or a maximum charge of Rs 10,000
# Union Bank of India: 0.50 per cent of the loan or a maximum charge of Rs 15,000
# Punjab National Bank: 0.50 per cent-1.25 per cent
(Service charge extra)
So go ahead and do your math. The paperwork required to shift a loan is not that much. Your property is already verified and so it is only a question of taking out time to do it.
This week we also begin a brand new segment - rating new products. Are they worth your money? And why are we doing it? Simply because there's a new financial product being launched almost everyday of the month, each claiming to be very different and better from the existing and you of course don’t have the time to read through the offer documents, or worse still simply mav be pushed by the agent. Well, we hope this section helps you a little bit to take a more informed decision. We may not be able to cover each and every product being launched but we will try and do as many as possible.
# LIC Jeevan Aastha
Product Type: 5 and 10 year single premium Life insurance
Closes on: 21 Jan 2009
If you pay a Premium of Rs 50,000 per annum, at the end of the tenure you get a little or that Rs 1,00,000 or 7.40 per cent
PF and PPF get you a better tax free return at 8.5 and 8 per cent
We recommend: DON'T BUY.
# Tata Infrastructure Tax Saving Fund
Product Type: 10 year closed end ELSS fund
Closes on: 16 March 2009
Fund House: It is known for frequent new fund offers
Fund type: Very risky. The funds predominant investment will be in the infrastructure sector which we clearly think is a high risk strategy. We would any day prefer a diversified ELSS scheme and frankly pretty dismal track record of all their earlier infrastructure funds.
Costs are industry average 2.25 per cent at entry, 2 per cent per annum thereafter.
Absolutely don’t buy. We see no reason for you to go into this one or any other new offering. And this is the time when tons of new ELSS schemes are floated in the market. Please stick to an existing ELSS with a good track record. We have already recommended Birla Tax Relief 96 and Principal Tax Saving from the OLM 50; you can also visit value research website and check their ratings of ELSS as well. It is an independent research body with good tracking systems in place.
So, that's all we have time for today. Till next week, stay financially vigilant and make informed investment choices.