Cheap home loans won't stay for long
Recent home loan rate cuts by banks and financial institutions may not be there for long, as it would lead to increased number of defaults, according to experts. In fact, the lowered interest rates will not be beneficial for the Indian scenario in the longer run.There are various reasons for this belief. First, there is an inverse correlation between home loan rates and property demand.
Aditya Verma, business head and vicepresident, Makaan. com, said, "Reduction in home loan rates will always lead to higher demand for properties. In 2006-07, when home loan rates were between 7.5-8 per cent, the property market was at its peak. With higher volumes come higher defaults and delinquencies. In the long term, lower rates will be beneficial for the real estate market but the loan provider needs to be careful in checking the worthiness of the loan taker."
Second word of caution came from Anand Narayanan, residential director, Knight Frank India Pvt Ltd. He said, "Sustained period of low interest rates become a fundamental necessity, if India has to achieve a higher home ownership among its populace." He added, "However, Indian banks unlike their US counterparts should not use low upfront interest rates as tools to make home buyers buy into intrinsically unaffordable properties. That would do more harm than good, as we all know by now from the US credit crisis." Therefore, those taking home loans at reduced or special floating rate of interest from banks should remain cautious and prepared for a possible increase of rates.Moreover, there is a correlation between the interest rates and the rate of inflation.
As Amrapali Group managing director Anil Sharma said, "Interest rates are dependent a lot on the inflation. If one is lowered, the other has to go up. So lowered rates by lending institutions are not a longterm trend. They have to bring it up after a certain time." If one looks at most of the recent home loan schemes, the interest rates are applicable till the first three years. After this, they will again come at an increased level.
Banks usually apply a unique method of rates to attract maximum number of home buyers. Verma of Makaan. com said, "The typical homebuyer in India is 28-30 years old and is more concerned about his near term (maybe 12 months) outflow. This is where these companies try and encash." Most home finance companies in India follow the 'ACCH model' to acquire homebuyers.
Here ACCH stands for awareness, coverage, consideration and hit rate.For established home finance companies first three such as ACC is not a concern.They resort to momentary rate change just to increase their 'Hit rate or conversion'. Verma added, "It might be surprising but for many homebuyers, choice for loan provider is actually determined by these momentary steps."