Home loan rates now in double digits

Interest rates on home loans have hit double digits three years after sliding below 10 per cent and going down to as low as 7.25 per cent.

Fixed home loan interest rates had already gone back to double digits and the floating interest rates would follow soon with the Reserve Bank of India tightening the prudential norms, bankers said on Wednesday.

The RBI on Tuesday raised the provisioning for standard advances for home loans above Rs 20 lakh (Rs 2 million) to 1 per cent from 0.40 per cent.

"So far, most banks and housing finance companies charge less on high value home loans. There will not be any incentive for chasing these loans any more," said a bank chairman.

Housing Development Finance Corporation is now charging between 9.75 per cent and 10.5 per cent for fixed rate home loans, a level, which was earlier seen in February 2003.

Its fixed rate loans with money market options (where the loan rate is fixed for the first two years and can be changed depending on the money market conditions) are priced between 9.15 per cent and 10.5 per cent. State Bank of India has stopped giving fixed rate loans for beyond 10 years.

Bankers said the rising interest rates had not dampened borrowings for home purchases as the rates were still within affordable levels, given a substantial rise in income levels.

This is making the RBI worried as it feels the unprecedented growth in home loans over the last two years has the potential to turn into a bubble.

"A rate hike in a range of 25-40 basis points within a month's time is inevitable, but Standard Chartered will take a decision in tandem with market movements," said Murali Natarajan, regional head, consumer banking, India and Nepal, Standard Chartered Bank.

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