Falling home loan rates in India - time to rejoice?

HDFC, ICICI, SBI and other banks have announced lowering of their home loan rates. Some of them have emphasized that this lowering is a 'festival offer' and applicable to new customers applying for variable rate home loans over the Diwali period.

Fixed rates continue to remain high. By itself, this is an interesting issue - if banks believed that interest rates have begun a downward trend, they should have sufficient incentive to lock in customers in to current high fixed rates as opposed to guiding people to variable rates. Variable rates are generally encouraged by banks when interest rates look like they may be going up. Market analysts suggest that this anomaly is due to high liquidity in the market. We remain unsure and think that should banks figure out rates are finally in a downward trend, fixed rates may also start to decline.

Declining home loan rates are generally good news for borrowers. However, do keep in mind the following:

1. Lowering rates in a growing income scenario improves affordability. A galloping Sensex only makes people feel even wealthier. Better affordability has been one of the driving factors of rapid real estate growth and price rise in India over the last few years.

2. A feeling of growing affordability can harden real estate prices and re-ignite demand. Therefore, while rates are going down, your dream home may get more expensive.

3. Lowering of rates are currently valid only for new customers. Rates for existing customers are typically linked to a 'reference rate' by each bank/HFC (housing finance company). These reference rates are generally not reduced that frequently creating a time lag for existing customers to benefit from rate declines.

4. If you are an existing home loan customer, you may want to consider exploring refinancing (balance transfer loan) at the appropriate time. For example, Indian banks and HFCs have an exit clause of 2% of outstanding amount - should your rates be higher than new rates by 2% + costs of setting up new loan (e.g. Rs 5000 or 0.5%), you may want pull out your calculator and have a serious discussion with your banker!