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The current interest rate seems to be at its peak for the short to medium term and one can expect a rollback in rates in the coming months, says SRIKALA BHASHYAM

Make it affordable: More banks could come out with flexible lending strategies.

Existing home loan borrowers sitting on large loan books can shop around more aggressively and look for a lender who is willing to offer a cheaper rate. As everyone is aware, State Bank has already announced a home loan with an interest rate of 8 per cent for the first year.

You can expect more banks to come up with similar product strategies which could involve a combination of floating and fixed.

At current levels, floating rate is a better option to be in and it is not a bad idea to shift your loan book to floating from fixed if your existing rate is far higher than current rate.

In the last few months, most of the banks and companies were focused on offering cheaper rate only to fresh borrowers. The existing borrowers have had little to cheer about.

However, the recent announcement by the HDFC to cut its prime lending rate and extend it to the existing borrowers who have borrowed money a couple of years ago is good news.

As you would have noticed, Reserve Bank in the last few months has been pushing for improved liquidity in the system with its regular CRR (cash reserve ratio) cuts. However, these measures did not have the desired impact for home loan borrowers, particularly for those who had borrowed loans more than a year ago.

These borrowers were forced to pay interest rate in the range of 11-12%. With many banks stepping up the pre-closure penalty and some public sector banks refusing to take over loans, it was not a happy situation for old borrowers.

To make matters worse, the difference between old loans and new loans had widened by as much as 2-3%. What added to the misery of borrowers was also the fact that many companies resorted to wage cuts and job cuts.

While the downtrend in the economy is yet to show clear signs of recovery, the ground for cheaper rate regime has got stronger with dipping inflation levels and government’s increased push for revival of economy. There is already a strong case building for a dip in interest rate and the general expectation is that interest rate could dip by 100-150 basis points.
Not far fetched

The expectation does not look far-fetched as a few macro factors are in place for the Reserve Bank to push for rate cut.

The inflation has almost reached the level of zero and there is enough room for banks to increase their funds for lending with yield from treasury dipping in the last few weeks. More importantly, property developers have finally resorted to realistic price cuts which have made banks slightly comfortable with lending for property. For the past few quarters, banks have been demanding that property developers reduce their prices as they believed that a softer interest rate in itself would not be good enough to revive the property sector.

While fresh loan seekers have few issues on hand, the current environment is more challenging for those who have taken loans in the last 12-24 months.

These borrowers have seen a dip in property valuations and in addition, the interest rate too has gone up 2-3%, resulting in higher EMIs. While both property price and interest rates have their own cyclical pressure, the good news is that recovery is in sight with respect to the interest rate. The current interest rate seems to be at its peak for the short to medium term and one can expect roll back in rates in the coming months.