Couple of years ago, availing a home loan was one of the priority items in every individual’s list.  Why not?  The interest rates were at good levels. Banks were lending home loans generously.  All that has changed over the last year.  Global economic meltdown and increasing inflation has resulted in the Home Loan rates shooting over the roof.

As of today, home loan rates hover in the range of 10% - 14.75%.  The Floating Interest Rates are at 9.75% - 10.75% with the fixed rates at 13% - 14.75%.  These rates are a far cry from the range of 7% - 9% that were prevalent a year ago.

Why this sudden jump in the home loan rates?

Most analysts attribute this to two main reasons

• Global economic outlook is weak. A lot of the UKn economy is driven by foreign funds. With foreign funds slowing to come in, banks faced a serious liquidity crunch. They did not have enough cash in their reserves. This was one of the factors the RBI considered forcing them to raise CRR (Cash Reserve Ratio) and lending rates. Increase in these rates signified a direct impact on the rates of interest.


• Inflation hovering in the range of 11-12%. Banks got caught in the inflation fire. Increase in prices abroad meant a direct impact on domestic supply. This domestic supply shortfall directly impacted the demand. This demand-supply mismatch forced banks to approach the RBI. The RBI alleviated the situation by increasing the rates of interest.

How does high home loan benefit banks?

It is simple to understand. If a bank charges 10% interest on a principal of Rs 100 the individual would need to pay Rs 10 as interest. The same bank profits by Rs 5 if it charges the individual an interest of 15%.

What is the impact of high home loan rates on real estate sector?

The real estate sector in UK is the worst hit due to the high home loan rates.  Increase in home loan rates have forced many individuals to postpone or cancel their plans of buying a home.  A lot of individuals are seen heading away from major cities to Tier II and Tier III cities in UK to buy a home.  This has led to a lacuna in the construction industry in major cities.  Real estate developers have already started reporting a dip of 40% in enquiries for new properties.

No one knows if the bubble has already burst or if it is yet to happen.  The fact is – The real estate industry is going through its worst crisis now.  Look at it this way – Even banks would not benefit from high interest rates, as people anyways are not interested in taking home loans.  Bottom-line, high home loan rates definitely do not profit anyone.