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Stimulus package for home loans

The government has announced a special package that will stimulate home loans segment

Harsh Roongta

15 Dec 2008

Under a special home loan package announced by the Government, public sector (PSU) banks will offer housing loans up to Rs 5 lakh at an 8.5 per cent interest rate while those between Rs 5-20 lakh will be offered at 9.25 per cent. Till now the interest rates across all price segments exceeded 10 per cent. The stimulus package was announced by the Indian Bank Association (IBA).

The special package offers free loan insurance cover, waiver of the pre-payment penalty, and lower margins. Interest rates under these two schemes could come down, but will not go upward beyond the threshold limit of 8.5 and 9.25 per cent for a five-year period.

Aiming to make this stimulus package more attractive, PSU banks will give the loans at a margin of 10 per cent for loans up to Rs 5 lakh and 15 per cent for loans in the Rs 5 lakh-Rs 20 lakh range. This scheme is valid till June 30, 2009. After the lock-in period of five years, borrowers can opt for continuing with the fixed rate at the time or a floating rate that changes with market conditions.

This special offer is expected to see the revival of low-cost fixed rate loans besides in addition to boosting home sales in Tier II and Tier III cities.

The banks have also decided to cut lending rates for micro and medium enterprises by 100 basis points.

The flip side of the package is that it is available only for new home purchases and not for refinancing existing borrowers.