State bank of India (SBI) home loan vs Housing development finance corporation (HDFC) Home loan – interest rate war is on!

It’s showdown time for the two biggies in the housing finance sector: SBI and HDFC. After the economic meltdown, most banks switched their attention from not-so-profitable commercial lending to retail lending, which have formed a sizeable part of their credit portfolio in the recent past. State Bank of India (SBI) was the frontrunner with its special 8 per cent home loan scheme till it was challenged by Housing Development Finance Corporation Ltd (HDFC). So what does HDFC offer to outdo SBI’s much-publicised scheme?

HDFC’s new home loan product comes at a fixed rate of 8.25 per cent per annum for the first three years (up to March 2012). However, these rates are applicable for loans up to Rs. 30 lakh and a maximum tenure of 20 years, and not on the other two slabs, i.e., loans between Rs. 30 lakh and Rs. 50 lakh; and Rs. 50 lakh and above. From fourth year onwards, HDFC will charge a floating rate of 5 per cent below its retail prime lending rate (RPLR) – the institution’s benchmark rate – on the loan. Currently, the RPLR is 13.75 per cent. This rate is available under special festive offer to all new home loan customers who apply before Jan. 31, 2010 and take at least part disbursement before March 31, 2010. NRIs and PIOs will also be benefitted from the festive offer rate.

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SBI vs HDFC
HDFC’s new loan offer is in direct competition with SBI’s Easy Loan scheme, but it is difficult to guess the winner. Now let us have a rundown on SBI’s Easy Loan scheme. Loans under this scheme are offered at a fixed rate of 8 per cent for the first year, 8.5 per cent the next two years and thereafter at a floating rate of 2.75 per cent below its benchmark rate (SBAR, State Bank Advance Rate) or at a fixed rate of 1.25 per cent below SBAR. Currently, SBAR stands at 11.75 per cent. The comparative rates of both SBI and HDFC are given in Table 1. Recently, SBI extended its special loan offer till March 31, 2009 to maintain its credit growth target and build up retail portfolio in lieu of a slump in commercial lending.

Earlier, HDFC was averse to the idea of discounted rate; it even criticised SBI special home loan scheme. HDFC stressed the point that the teaser rates offered in the initial years could cause widespread defaults when rates surged in later years. So what made HDFC change its stance? It has reasoned that ample liquidity, improved operational efficiency and good quality portfolio have made the discounted rate possible for it. Whatever may be the reason, it is important to see whether borrowers will benefit from these new rates.

Analysis

We, at Rupeetalk, always try to provide fair understanding and impact of the special loan rates on customers (Read: SBI special home loan: A boon or bane?), and what effect they will have on their cash flows.

Read Home loan tax implications

Here, we have analysed HDFC and SBI offers in terms of interests paid in the first three years, total interest paid and effective interest rate for the complete tenure (refer Table 2 and 3).  In Table 2, we see that there is a marginal difference in the first 3-year interest components of both the lenders. However, in terms of total interest payments, HDFC scores over SBI; HDFC borrowers save Rs. 75,683 in interest compared to SBI borrowers. The effective interest rate in case of HDFC comes to 8.69 per cent compared to SBI’s 8.85 per cent.

However, in case of a Rs. 60-lakh loan (refer Table 3), interest component in the first 3 years varies considerably, i.e., 19.90 per cent and 22.34 per cent of the total interest paid for SBI and HDFC, respectively. If the borrower is looking to prepay his/her loan, SBI’s offer would be a good bet in this case. SBI also scores over HDFC in terms of total interest paid, and thus, the effective interest rate comes to 9.69 per cent for SBI in comparison to 9.78 per cent for HDFC. Here, HDFC borrowers end up paying Rs. 70,348 more than SBI borrowers.

No respite for existing customers

It is clear that these schemes are sales gimmick to lure new customers, for the banks have completely ignored their existing customers. These reduced floating rates are not applicable to the existing customers of both the schemes. In this condition, the existing customers can either renegotiate rates with their banks for a levelled interest rate or shift their loan to other lender for a better rate. Note that refinancing a loan may require a customer to pay prepayment penalty as high as 2 per cent.

Conclusion

The steady recovery of the Indian economy has spread cheer to almost every sector, and the real estate market is no exception. After going through a rough patch, it is regaining its composure. This is the time to buy a house for many, with the property prices coming down by 20-30 per cent and banks offering special rates to sell home loans and achieve their individual credit growth targets. SBI and HDFC, which control a sizeable portion of retail lending in India, are better placed to take advantage of these conditions with their special loan schemes. Both the festive rates seem to have marginal difference in terms of effective interest rates, however, borrowers are advised to read the fine print before closing a deal so that there won’t be any regrets later.

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1. RBI’s new base rate norms – Reduction in home loan interest rates to result in lower home loan EMIs for existing customers as well
2. Should you opt for a 1 year fixed interest rate home loan or a 3 yr fixed interest rate home loan.
3. Impact of increase in home loan interest rates on home loan emi in India
4. How home loan interest rates change in India and how they impact you
5. How to select a fixed period low interest rate home loan