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Tuesday, December 16, 2008

Home Loan Rate Cut - Election Gimmick

Under severe pressure from the Government the Public sector banks announced a rate cut for the home loans upto 20 Lakhs. From now on Home loans upto Rs 5 Lakhs will carry an interest rate of 8.0 % and those between Rs 5 - 20 Lakhs will carry an interest rate on only 9.25%.

Hold on! Don't rush to the bank yet. Read the fine print. The rates will be valid only for new home loans and the existing borrowers will continue to bear the burden of the older interest rates. To top it all the new interest rates will not even be passed on to to the floating rate customers. The SBI chief announced that there won't be any PLR cut soon. PLR is the factor dictating the rate of interest for the new loans as well as the floating interest loans. Last option.... that too is taken care of by the financial wizards of this country. The new rates will not be effective if you swap your loan account with some other bank. Last nail in the coffin, The rates are effective only for first five years and will subsequently be brought up to match the existing market rate.

It is evident that this measure has been promulgated to tap onto the general voting public since these days even in the tier two cities the homes of two bedrooms and more are costing much more than 20 Lakhs. The PLR not being brought down can only mean that the existing borrowers will in effect be financing the new borrowers to some extent. Thanks to the scheme one can generally forget a rate cut in PLR for a long, long time unless there is a drastic improvement in the economy. Rob Peter To Pay Paul. Haven't we heard that before?

However the scheme gets murkier especially if one has to believe the news reports doing the rounds. Apparently the PSU banks have reduced the loan limit to about 50% of the cost of the house. That essentially means that if you want to take the full advantage of the lowered interest rates, you have to pay almost the same amount of money as the down payment. That is, if you want Rs 20 Lakhs loan you have to choose a house worth Rs 40 Lakhs and pay Rs 20 Lakhs as down payment. Where does one get that kind of money? Same goes for the poorer(relative) section of people also. Where does a man who can afford only a Rs 10 Lakhs house get Rs 5 Lakhs to make the down payment. Therefore we can safely assume that no one is going to benefit from this announcement other than the feel good factor amongst those who are not planning to buy a house. They are the only ones who will appreciate the efforts of the government to help the economy of the country as well as help the citizens in getting their dream house. They might just even vote for the incumbent government in the forthcoming elections.

What will it take for the Powers that be of this country that the economy is more complex than just interest rates?

Phew! So much of print space, time in meetings and public money must have been wasted to decide and announce this seemingly useless exercise which does not seem anything more than an election gimmick.

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