Home loans get cheaper as SBI sparks flood of lending rate cuts

State Bank of India (SBI) on Monday set off a rate war, offering home loans as cheap as 8.5%, the lowest in six years. ICICI Bank Ltd slashed its rate in response, a move that will likely be followed by a host of other lenders, many of whom have already cut their benchmark lending rates.

SBI also introduced a a hybrid loan product which allows customers to tie up a fixed-rate loan for the initial two years, which will get repriced later.

SBI said that customers would be able to avail of home loans up to Rs30 lakh at a fixed rate of 8.55% for the first two years of the tenor of the loan, which would later be readjusted to a floating rate. For women, the home loan rate has been fixed at 8.5% for the first two years.

The move came after the bank said on Sunday that it had reduced its marginal cost of funds-based lending rate (MCLR) by 90 basis points (bps). The one-year MCLR, which is used to price home loans, stands at 8%. A basis point is one-hundredth of a percentage point.

Only about 15% of the bank’s home loan book is under the MCLR mechanism of rate calculation, while the remaining loans still use the base rate system. Customers have to pay 0.5% of their remaining loan amount to convert their loan agreement to MCLR.

While the structure of this loan product is reminiscent of the controversial teaser loan product, the bank insists that it isn’t a teaser product at all since the difference between the fixed rate and what the customer will pay on conversion to floating rate is only about 10bps.

SBI has priced its regular home loans at a premium of 65bps over the one-year MCLR for loans up to Rs75 lakh—i.e., at 8.65%.

ICICI Bank’s new rates offer loans up to Rs75 lakh at 8.65% for female borrowers and 8.7% for others.

Analysts said this steep rate cut was testament to the fact that banks really have nowhere else to turn.

“Home loans could be an area where a larger portion of the loans disbursed this year will go into. We still have to wait and watch if people are going to jump and buy houses in the near term,” said Siddharth Purohit, senior banking analyst at Angel Broking.

According to RBI data, the total housing loan portfolio of banks at the end of November was at Rs8.15 trillion. In addition, there are housing finance companies, which form nearly 35-40% of the total mortgage market, which was estimated to be over Rs 12 trillion as on 30 June, according to estimates by Icra Ltd.

While SBI continues lead the housing loan market with over Rs2 trillion loans as on 30 September, competitors such as Housing Development Finance Corp. (HDFC) Ltd and ICICI Bank are at its tail.

“Interest rates and demand as such have very little correlation, so you can’t say that they will work in tandem. But if the interest rates in the system have been falling, the benefit has to be passed on to home loan customers without fail as they are some of the best customers any lenders have,” said the head of one of the largest housing finance companies in India, requesting anonymity.

Apart from the regular home loan products, SBI has also announced a bridge loan product for customers wanting to buy a new house before their old house is sold off. The bank will provide a two-year loan to buy the new house at 10.45% in the first year and 11.45% in the second year, within which the old house is expected to have been sold off and dues settled.

SBI also launched an instant top-up product, where customers will be allowed a top-up loan for home improvement at 1% over the one year MCLR, said chairman Arundhati Bhattacharya.