The Hindu : Karnataka / Bangalore News : Get a home loan at a fixed rate when you can

Online edition of India's National Newspaper
Wednesday, May 05, 2004

Karnataka

Karnataka - Bangalore

Get a home loan at a fixed rate when you can

By Harichandan A.A.

Dream home? Finalise your loan interest rate first. — Photo: Sampath Kumar G.P.

BANGALORE, MAY 4. While many customers are still holding out for the next set of lower interest rates on housing loans, banks are already uneasy about the current rates. They fear their own borrowings could soon be at higher rates, making long-term housing loans at fixed low rates unviable.

Among the reasons for this are signs in the U.S. that interest rates could firm up. Some banks have already stopped offering fixed rates on long-term loans (from five years to 20 years).

So, if you were considering a "home loan," it would be an interesting exercise to talk to builders of medium-size housing projects and ask them which banks and/or financial institutions they would rather work with. Chances are they would have strong preferences, as disbursals would be their top priority. The chat could also throw up some good ideas on where to go for long-term loans at fixed rates.

Ahmed, a director with a Bangalore-based construction firm, says: "The trend today is that there is so much competition that banks are trying to outdo each other with lower interest rates to grab customers. This may not be sustainable."

Banks must manage their costs and make a profit on the difference between the interest they pay to their lenders and the interest they charge their customers. "Ever-decreasing interest rates on housing loans would squeeze this margin until the time when it will no longer be viable." And that is not far away, he feels.

Housing finance institutions such as Housing Development Finance Corporation (HDFC), which have access to longer term funds from their lenders, could be a better bet when it comes to getting long-term loans (20 years, for instance) at fixed interest rates. In the past three months, HDFC Bank Limited (HBL), a group company, has started sending its sales executives to approach customers offering them flexible housing loan options. HBL still offers fixed interests on 20-year loans, an executive says. In Bangalore, HBL has about 30 sales executives and is hiring more, he says.

Getting a housing loan has become easier with the large private banks working in tandem with the builders, making the process of filling up forms and completing other documentation simpler as part of their aggressive sales campaign. But, there can be problems: for instance, the ratio of the bank staff to the number of loan applicants can determine the quality of service. As part of a larger team, a member of staff would work on fewer files, and he or she could be more efficient.

As to the builder, consider Mr. Ahmed's "terrible experience" with a major private bank: "Sometime back, we had a project with 52 flats, which I submitted to this bank for approval. The bank sent direct sales agents to us. One took our file, told us he had submitted it, and vanished. Soon we found he had left because of intense work pressure and joined a rival bank. He then offered to get the project approved from that bank. After three months, the private bank we first went to approved the project but refused to meet our schedule for disbursals. While all this was happening, six other banks approved our project and some 34 flats were sold!"

Ferreting out such information could well be worthwhile. Meanwhile, locking in loans at the lowest available fixed rates may not be a bad idea.

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