State Bank of India (SBI), the largest bank in India and one of the leading players in the housing finance market, has raised interest rates on home loans. Although the bank will continue with its 8% teaser rate — which the SBI had introduced more than a year ago — for the first year, it has increased rates for the subsequent years, effective April 1. The hike in home loan rates by SBI was triggered by the recent increase in its cost of funds.

Till March 31, SBI had two schemes — The Easy Home Loan (up to Rs 50 lakh) and Advantage Home Loan (above Rs 50 lakh). ‘‘From April 1, both the schemes have been merged and extended for a month,’’ an SBI spokesperson confirmed to TOI. ‘‘The rates applicable for new loans sourced from April 1 till April 30 are 8% for the first year, 9% for the second and third years and floating rate at 1.75% below SBAR (SBI’s equivalent of prime lending rate, or PLR) thereafter,’’ the spokesperson added. So in effect, the home loan rates for the second and the third years have gone up by 50 basis points (100 basis points=1%), from 8.5% earlier to 9% now. While fourth year onwards, at the current structure, the interest rate will be at 10% per annum, since currently SBAR is at 11.75%. Earlier, from the fourth year onward, the floating rate was at 2.75% below the SBAR and the effective rate was 9%.

Under the new rate structure (assuming a 10% rate from the fourth year), on a 20-year loan of Rs 30 lakh, a customer would have to shell out about Rs 3.9 lakh over the tenor of the loan. Thus the effective rate that the customer would be paying over the 20-year period is 9.5%. Explaining the rationale for hiking rates on home loans, the SBI spokesperson said it mainly reflected ‘‘the increased cost of funds from April 1 stemming from the new methodology for paying interest in savings bank accounts on daily balances.’’ In April 2009, Reserve Bank of India (RBI) had mandated all the banks in India to move to a new methodology of calculating interest rates on savings bank accounts that would add interest on a daily basis. This is a significant departure from the earlier practice of calculating interest rate on minimum balance after the tenth of every month.

For sometime now, with the annual rate of food inflation hovering around 20% level and the yields on benchmark 10-year government securities around the 8% mark, bankers and home finance veterans were talking about the possibility of a hike in interest rate in the economy. And now with SBI, the country’s largest bank, hiking housing loan rates, industry players are almost sure that interest rates have bottomed out in the current cycle. Lately a number of banks and financial institutions, including the country’s home loan pioneer HDFC, have withdrawn their home loan products at 8% or at a slightly lower rates, and are moving to a more sustainable interest rate structure.

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