The biggest positive outcome of demonetisation, surprisingly, has come from an unexpected corner – lending rates have fallen quite drastically. The new home loan rates have been brought down to as low as 8.65% that is being offered by India’s largest public sector bank while other banks and housing finance companies too have followed suit by slashing lending rates by about 0.50%.
With high level of liquidity due to cash deposits, banks have been forced to reduce rates even before the much anticipated Union Budget, hoping such reduced rates would spur credit demand. If inflation continues to be benign there may be more rate cuts and during financial year 2017-18 the rates may rule in the range of 8%.
The rate cut would largely benefit new home loan borrowers rather than existing borrowers due to MCLR (marginal cost based lending rates) based rate calculations. The MCLR was introduced in April 2016. Those who took loans before that would not benefit since they were linked to the earlier base-rate calculations.
The disparity between new and existing borrowers will continue since reduction in MCLR month on month may not necessarily mean lending rates would be reduced. Each bank uses a different benchmark period for setting the rates; some banks use monthly benchmarks and some use annual.
Though the MCLR rates have come down by about 0.90%, interest rates have been reduced by only 0.50% on home loans due to the new calculation method. Nevertheless, with the Central government giving impetus to affordable housing the demand for property as well as home loans is expected to pick up. The Budget too is expected to be people friendly that may bring new sops for this segment.
Further, the much criticised “teaser loans” are making a comeback. Under this option, lending rates will be fixed for initial years (about two years usually) and will be linked to regular MCLR-based rates at the end of such tenure. This may have a few pitfalls: if the rates gets reduced in the first two years by about 0.50%, the benefit will not be passed on to customers, they remain at the fixed rate. The EMI outflow would be higher compared to those who would have opted for the regular floating rate.
At the same time if the rates got higher after the completion of the teaser period there would be higher outflow of EMI. Yet, choosing a teaser loan seem to be beneficial since interest rates may not peak in the years to come due to several positives of the Indian economy. However, one should be prepared for the cognitive dissonance (post-purchase behaviour) if the rates go down after taking loan under this “teaser” offer.
The coming year could be quite challenging due to the effects of demonetisation where the country would be witnessing a major behavioural transformation when it comes to dealing with money.
