The Hindu Business Line : Floaters back in favour with home loan takers

FEARS of a rise in home loan rates seem to be ebbing from the minds of borrowers. Banks and housing finance companies are reporting that borrowers are again opting for floating rate loans against fixed rate loans, as seen a couple of months earlier.

Last year, yielding to the pressures of tightening liquidity conditions, rising inflation and apprehensions of a global hardening in interest rates, banks and institutions raised home loan rates by 25-50 basis points.

Even as the pressures were building up, customers were locking into fixed rate loans in anticipation of a spike in interest rates. The situation seems to have changed, with borrowers now willing to take a gamble on floating rate loans.

The recent spurt in floating rate loans is indicative of an easing of tensions on the housing rates front. However, analysts and bankers maintain a `cautious' view on interest rates for the medium term.

The sudden surge of surplus rupee funds in the system, the recent softening in bond yields as compared to the peak levels witnessed a couple of months ago, along with an easing in domestic inflation have led to some amount of comfort in the liquidity situation for bankers. This has led to the view, that interest rates are unlikely to move up as fast as initially forecast.

"We feel that interest rates are likely to remain stable in the near-to-medium term. The market will continue to grow at the rate of 30 per cent to 35 per cent this year. The housing loan market as a whole saw disbursements of around Rs 51,000 crore last year. This year disbursements are expected to touch Rs 65,000 crore," said Mr Rajeev Sabharwal, Chief Operating Officer, ICICI Home Finance.

Even as there is a shift in customer preference to floating rates from fixed, concerns of transparency among the players in the industry, with respect to how they structure their interest rates continue to be rampant in the market.

"The real issue today is that there continues to be a lot of concerns on what are fixed and floating rates. In some cases, market participants are even offering `fixed-rate' loans, which under extreme conditions become floating," according to Mr Kapil Wadhawan, Managing Director, Deewan Housing Finance Ltd.

Since interest rates are linked to the cost of funds of banks and financial institutions, analysts are of the view, that although the rates are not likely to inch up drastically in the near future, they are unlikely to come down to a large extent from the current levels. The rising level of non-performing loans and frauds in the housing finance sector has emerged as a major concern for players in the industry in the past year.

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