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Home loans cheaper

india Updated: Dec 12, 2008 00:46 IST

Public-sector banks are set to bring down their home-loan interest rates to 7.5 per cent for loans of up to Rs 5 lakh and 8.5 per cent for loans between Rs 5 lakh and Rs 20 lakh.

Only fresh loans are eligible for the lower rates, but existing borrowers can switch to cheaper loans by making a one-time penalty payment. The government may bear some fiscal burden in the process.

A meeting of key banks, the Indian Banks Association and Finance Ministry officials hammered out a package on Thursday to boost affordable housing and revive a sluggish home-building sector. A formal announcement is expected within the next couple of days, government and banking sources told Hindustan Times.

Existing home-loan customers can also benefit by opting for a balance-transfer facility from a public-sector bank. “It makes sense for everyone to move from high interest rates to the low interest rate benefit being offered by the government even if they are required to pay a penalty of 2 per cent, because the benefits are significant,” said Surya Bhatia, a Delhi-based financial planner.

While real-estate sales have been slowing down primarily on account of high interest rates accompanied by an escalation in property prices, the move aims to regenerate demand.

But bankers suggest that lending at such low rates is neither desirable nor feasible. “We expect an interest subvention (government payment) in order to offset this huge cost on us,” said the head of a public-sector bank on condition of anonymity.

Bankers said a subvention of at least 2.5 per cent would be required.

But economists feel that real estate has linkages to several industries and therefore this move will be beneficial.

“It’ll boost the construction, real-estate, steel, cement and several industries along with raising labour demand,” said DK Joshi, principal economist at credit rater Crisil. “It has stronger linkages to the economy and will have a spillover benefit.”