ICICI Home Finance and State Bank of India's housing finance division are aggressively looking at refinancing of existing loans to capture a larger pie of the existing market, following the Central Board of Direct Taxes (CBDT) clarification that even refinanced home loans will get full tax benefit.
ICICI Home Finance is even willing to finance the prepayment charges of old loans and the processing fee charge for new loans. ICICI Home Finance managing director Madhabi Puri Buch said the necessary clarification sought from CBDT has been received.
"It makes sense for a customer who took a loan four to five years back at the then prevailing rate of 18 per cent. On a Rs 10 lakh loan taken for 15 years, he would save over Rs 3.6 lakh in interest payments," said Buch. At the same time the borrower would continue to enjoy tax benefits as applicable to normal loans.
"Refinancing of old loans has taken off well in the metros and urban areas, but has not been as encouraging in the smaller metros," said Buch.
Housing Development Finance Company (HDFC) managing director Keki M Mistry said instances of prepayments are not on the rise as the cost differentiation is not much. He further added that there is "an element of doubt on the tax benefit post refinancing of old loans".
HDFC and ICICI Home Finance incidentally reduced the interest rates on home loans by 25 basis points. In response to whether further cuts are on the anvil following other players being cheaper, HDFC executive director Renu S Karnad said that the difference in interest rate may be less by around 25 basis points. "If we keep on reducing our rates just to keep pace with competition, we are still accountable to our shareholders,"said Karnad. For banks which offer housing loans, it is just one of its products, for HDFC, "it is our bread, butter and jam", she added.
HDFC reports 6 to 8 per cent of loans being pre-paid annually, and this -- according to Mistry -- is factored into the life on its assets.
National Housing Bank (NHB) executive director Radhey Shyam said that prepayment of loans as interest rates are softening will increase and housing finance companies will have to face the competition. NHB, which lends funds to housing finance companies, also borrows at high rates of interest, and if it is to allow companies to pre-pay loans, it will face difficulties, he added.
"The viability of financial institution will be at stake if NHB allows refinancing...but we are looking into it," said Shyam.
