The government is definitely pushing us to buy more. Loan rates are down, excise and service taxes are down. But finally a bit of good news is trickling in; there are lower prices and more money to spend.
But what do these big announcements mean to you and me? Will we really see more money in our wallets? And will prices really come down?
We've been saying, don’t bite into buying a house just yet. Builders will simply have to blink and the biggest of them all finally did this week - DLF announced upto a 20 per cent cut in prices of its new projects in Chennai and Bangalore. Promising to refund customers who have booked a house in these developments at an earlier date. While we are all aware, prices have been softening for some time. This formal move made by DLF only confirms that the next12 months could bring you some great home deals and what's more - the softening of home loan rates has already begun. While private sector banks are still not budging for now, PSU banks are and SBI, India's largest PSU bank has already announced a special scheme with just 8 per cent on home loans for the first year of your home loan. But is the SBI deal the best in town? That's the question we'll be answering today.
Big Question: 8 per cent SBI Happy - Home : The Best Deal?
We need to look at the SBI reducing its loan rates in the context of a larger government push to stop the slowing down economy.
This happens in two ways:
# Reduction of interest rates - that will get industry to begin investing again and get retail investors to switch out of low interest rate deposits to either equity or spending
# Cutting of taxes - the excise and service tax rate cuts are aimed to increasing out spend to give that boost to demand
Yes, we'll find goods and services marginally cheaper in days to come.
Coming specifically to the home loan stimulus package. Even before SBI made this big splash with its 8 per cent teaser rate, the PSU banks have already announced a few concessions. These four benefits are available till June 30, 2009. You get loans with:
# No processing fee
# No pre-payment charges
# With free life insurance cover
# An unchanged interest rate ceiling for the next 5 years for loans less than Rs 20 lakh
But, yes the SBI 8 per cent rate sounds very tempting. And what are the details?
Well the SBI teaser rate of 8 per cent is tempting enough for us to make a beeline for a SBI Home loan. But is it the best deal in town? Well, let’s start with the basics.
First point you need to not: this is 8 per cent fixed home loan rate ONLY for the first year. From the second year onwards, you will get the rate that is applicable today. For loans less than Rs 30 lakh, this would be 10.25 per cent and for loans more than 30 lakh, you would pay 10.75 per cent. But if the rates were to fall over 2009, you would get the benefit of the lower rate when the year ends. And who all can take this loan; of course anyone who wants a new home loan and anyone who wants to shift an existing loan. So both can avail of this special scheme.
The SBI Home Loan Deal
# First year teaser rate: 8 per cent
# Year 2 to 20: For loans less than Rs 30 lakh: 10.25 per cent
# For loans more than Rs 30 lakh: 10.75 per cent
# Open till: 30 April, 2009
Wherever there are two rates we need to look at a number called the blended rate; that means what is the average rate over the life of the loan, if the loan rate differs across some of the years.
Step One: Find out the average SBI rate
# In the case of SBI, we take the first year rate as 8 per cent for a 20 year Rs 40 lakh loan
# From year 2 to 20 we are assuming the current rate of 10.75 per cent
# Now when we take out the IRR or the internal rate of return, or the average of the two rates, we get a blended rate of 10.37 per cent a year for 20 years as the rate that you will face under the new SBI scheme
Step Two: Compare that with other loans
# Now, the next step for a decision to take this loan would be to look at the cheapest home loan in the market
# Data from Apnapaisa.com tells us that this is from LIC Housing Finance at 9.75 per cent. Clearly, there is a cheaper rate out there in the market today.
So, is SBI the best?
# Home Loan Amount: Rs 40 lakh
# SBI blended rate: 10.37 per cent
# LIC Housing Finance: 9.75 per cent
# Loan duration: 20 years
And here’s how the cheapest loans vis a vis SBI blended rate look:
For a Home Loan Amount of Rs 40 lakh and loan duration of 20 years -
# SBI blended rate: 10.37 per cent
# Punjab National Bank is at 10.25 per cent
# Bank of Baroda and Canara Bank are both at10.00 per cent and
# The cheapest is LIC Housing Finance at 9.75 per cent
So clearly the rational for biting the SBI home loan is only if you're paying more than 10.37 per cent on your home loan, you should switch to the SBI loan. Do not switch if you are paying less than 10.37 per cent.
And even if you're considering a switch, just knock at the LIC Housing Finance door, to see whether they will give you the 9.75 per cent rate for a loan that is being switched. If yes, definitely the best deal to go for.
And while we are at the SBI rates, let’s look at their new car loan rates.
Well, if you are not yet buying that home, how about the car that you wanted to buy. Is it time to lock into that 10 per cent loan rate now?
SBI Car Loan Deal
# First year car loan fixed at: 10 per cent
# Can buy car till: 31 May, 2009
# Loan upto 3 years: 11.50 per cent to 11.75 per cent
# Loan between 3 to 5 years: 11.75 per cent
# Loan till 7 years: 12 per cent
ALL RATES ARE FLOATING
The point to note is that we have the option of a 7 year loan with this package while other banks usually give 3 and 5 year loans as the norm.
Looking closely, SBI definitely stacks up well on car loans compared to most private banks, which are at least a 2 to 4 per cent higher.
For a loan amount of Rs 5 lakh for a 5 year loan, the 10 per cent year one and 11.75 per cent rate for the four years will work out to a blended rate of 11.62 per cent a year. Cheaper than that, we have one other loan in the market. Number crunching here has been done by our knowledge partners for loans, that's apnapaisa.com/. Band of Baroda for a similar loan, is at 10.5 per cent.
SO, SBI rates, definitely not the best as yet.
While a 1 per cent difference on a car loan is something you can live with, on a home loan a difference of 1 to 2 per cent or even more can make a huge dent in your pocket.