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Loan hope for first home
- Banks may offer lower rate to people not owning a house

Mumbai, Nov. 13: If you are a first-time home loan seeker spooked by the thought of spiralling interest rates, take heart. Banks could soon be wooing you with the cheapest home loan in their portfolios.

The Reserve Bank of India is reportedly considering a differential interest rate structure that will be loaded against those seeking a loan for a second home, say banking industry sources.

“The benign interest rate regime had sparked an accumulation of assets, with many people going for that second or even third house. This also builds up speculative price increases in the real estate sector,” a banking official said.

“The central bank wants to help the common man buy that much-required and coveted first home and is, therefore, working out a differential structure of interest rates.”

This means the individual seeking a loan to buy his first home will get the cheapest interest rate. “We expect the RBI to usher in changes in the next quarterly review of credit policy in January,” the official said.

Banks have already been asked by the finance minister to re-balance their credit portfolios and pare their exposures to the property, home and personal loan segments.

RBI governor Y.V. Reddy — who in the mid-term review of the credit policy on October 31 voiced fears about the possible overheating of certain sections of the economy, especially in the home loan segment — had earlier observed that with rising income levels many individuals were going in for a second house.

“We feel that multiple acquisition of houses could increase risks,” Reddy had said during the first quarter review of the annual credit policy.

He had then raised the provisioning on advances for residential housing loans beyond Rs 20 lakh and commercial real estate loans. This was also done in the case of personal loans and other loans and advances qualifying as capital market exposures.

“This was the first signal that the central bank already had a differential treatment in mind for assets bought as investments and for living purposes,” a banker said.

It is believed that the apex bank is also considering a rate differential in financing a residential and commercial project.

The RBI has been taking periodic steps to head off the build-up of an asset bubble in the housing segment.

In July 2005, it had raised the risk weight on exposures to commercial real estate from 100 to 150 per cent and in April 2006, it was further raised to 150 per cent.

While a group within the banking industry backs the favourable rate for the first-time home buyer, another group argues against it.

“Why should someone pay a higher rate of interest' It would be more suitable to bring in other measures like increasing equity, thereby reducing risks,” said another housing finance official.

According to him, such buyers could be allowed lower loan amounts rather than being charged higher rates. Instead of financing 80 per cent of the cost of the house, banks may give loans to cover only 60 per cent of the cost.

It could also be a shorter duration loan. For instance, instead of giving a loan of 20 years, the loans could be limited to, say, 10 years. In any case, a shorter tenure loan will attract a higher rate of interest.

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