MUMBAI: Home loan seekers may be in for a windfall with mortgage companies set to embark on an interest rate war amid a slump in the cost of funds as a consequence of demonetisation, in the process acting as a tonic for the moribund real estate sector.
Mortgage companies like Housing Development Finance Corp (HDFC), Indiabulls Housing Finance and DHFL may slash rates by 25-50 basis points in a few weeks as they are under pressure to push growth amid sluggish demand, said industry executives familiar with the matter. A basis point is one-hundredth of a percentage point.
“Demonetisation has inadvertently helped cut funding costs for us as we raised cheap money from bond market,” said Indiabulls Housing MD Gagan Banga. “We should be able to pass on benefits of lower borrowing costs to customers as we expect higher home loan demand in coming quarters.” He didn’t say what the new rates would be. Demand for homes and home loans slumped after the Centre announced on November 8 that Rs 500 and Rs 1,000 notes would cease to be legal tender. This blocked the flow of black money into real estate, traditionally a key store of unaccounted wealth. On the other hand, the flood of deposits due to demonetisation has helped lower the cost of funds across the board.
To be sure, real estate prices may have to drop appreciably before prospective home buyers take the plunge, even with lower rates, given that demonetisation has turned Indians into penny pinchers amid cash shortages.
Housing finance companies on average have seen borrowing costs fall 25-30 basis points in the wake of demonetisation with companies raising funds via bonds and commercial paper. Indiabulls Housing raised Rs 500 crore by selling bonds at 8.3 per cent in November, having got Rs 150 crore selling debt at 8.55 per cent about two months ago, according to Prime Database.
“In October and November, incremental borrowing costs have come down for companies tapping the bond market,” said Keki Mistry, vice-chairman and CEO of HDFC, India’s largest mortgage lender. “Housing finance companies will also see increased opportunity for credit expansion in coming quarters. Lower borrowing costs will bring down lending rates across the industry.”
On November 11, HDFC raised Rs 2,000 crore at 7.8 per cent, 32 basis points lower than what it paid to raise Rs 1,000 crore a month earlier, according to Prime Database. “It is expected to provide the much-needed fillip to the real estate and housing finance industry by expanding credit flow and home ownership,” said DHFL CEO Harshil Mehta. “The sector is set to reap benefits of these stellar initiatives in the coming years.”
Given that there have been rate reductions by banks and housing finance companies themselves during the year, the additional rate cuts should be welcomed by borrowers. “Lowest interest rates offered by HFCs have come down by around 30-40 bps in the current financial year,” said Karthik Srinivasan, senior vice-president of rating agency ICRA. “We expect them to react to rate cuts by banks and offer competitive pricing to prospective borrowers.”
Credits ET Realty