No more teaser rates on home loans as bank move to base rate

From Wednesday teaser rates offered by big banks will withdrawn back as banks move to a new system of pricing loans from July 1.

The big lenders – HDFC, ICICI Bank and State Bank of India had last year launched special loan schemes in which they offered low rates at fixed rates for the first couple of years — will end on June 30. The bank officials said, now none of these schemes can be extended.

India’s largest bank — SBI’s and ICICI Bank’s home loans will be priced on new base rate from July 1. SBI was the first lender to introduce teaser rate scheme offering home loans at 8% for the first year, 9% for the next two years and linked to market rates in the subsequent years.

Followed by, HDFC bank, which offered loan at fixed rate of 8.25 % up to March 2011, 9% for 2012-13 and the prevailing rate thereafter.

Then ICICI Bank offered a fixed rate of 8.25% during the first year, 9% in the second year with the loan then being shifted to a floating rate linked to the prevailing benchmark.

SBI during the special scheme witnessed aggressive sanctioning of loans on an average of Rs 2,000 crore of home loans every month. Therefore bank extended the scheme, as did HDFC, the leader in the mortgage lending segment.

But shift to new benchmark it is not clear that how banks will price their home loans, although banks have indicated that their base rates will be in the range of 8-10%. Banks are not clear that how they would lend.

Under the new base rate system no bank can lend below the base rate. Moreover old borrowers will have the option to shift to the base rate as the new benchmark. According to some bankers they might have to continue announcing the prime lending rate as a benchmark simultaneously as they have signed contract with borrowers to peg interest rates to the PLR.

The base rate will be favorable for borrowers in a falling interest rate regime as lenders will have to revise the base rate to reduce lending rates.

However RBI has made it clear to the banks that any changes in base rate will have to be applicable to existing customers also. The most important thing to notice is that RBI has only told banks to adopt the base rate system, and the new system will not be applicable to housing finance companies and NBFCs.

In the old system the benefits offered to new borrowers were not forward to the old customers on their home loans as banks offered low rates to new customers while old customers continued to pay higher rate.

According to banking analysts if the base rate is set in the range of 8-10%, home loans, will have to be priced higher than this. Furthermore, home loan rates are likely to increase as interest rates are expected to rise.

Meanwhile, many banks have held back a review of their interest rates until the adoption of the new benchmark. RBI executive director Deepak Mohanty pointed out that the base rate system will not increase the effective cost of borrowing as projected by the corporate lobby and that it is aimed at bringing transparency in the lending rates.

On the other hand bankers say that interest rates on home loans will continue to be competitive as it is a secured loan.