- Home loans have never been cheaper in the last decade, and despite the fact that house prices are higher, these rates offer a good opportunity to buy a house.
- On the other hand, government bonds are now more expensive than mortgages, which may seem odd.
- However, there is a simpler explanation – read on to find out.
Home loans are at their lowest in a decade, with banks and finance companies offering interest rates as low as 6.4% a year.
If you’re thinking about taking out a home loan and buying your dream home, you might be thinking now might be the perfect time — and literally — a once-in-a-decade opportunity. Especially since experts believe that house prices may not come down anytime soon. So, all things considered, the timing seems right.
But have you ever wondered if banks and finance companies are willing to offer you, an individual, a home loan at a lower rate than the Indian government pays on its borrowings?
The chasm between home loan interest rates and what the Indian government pays is even more exaggerated when you consider the fact that an individual is far more likely to default on a loan than the Indian government.
What makes this even more absurd is the fact that not only can you borrow at a cheaper rate, but you can also claim deductions under the Income Tax Act, further reducing your effective cost of borrowing, explained Vikram Kotak, co-founder of Ace Landsdowne Investments. , in an interview with Business Insider.
Here are the home loan interest rates offered by some of the most popular banks and finance companies in 2022:
| Bank/financial | Starting interest rate (per year) |
| Union Bank of India | 6.40% |
| Bank of Baroda | 6.50% |
| Kotak Mahindra Bank | 6.55% |
| HDFC | 6.70% |
| ICICI Bank | 6.70% |
| Citibank | 6.75% |
| National Bank of India | 6.75% |
| LIC Housing Finance | 6.90% |
| Axis Bank | 6.90% |
Source: Bank and finance company websites
And here are the government bond yields:
| Duration | Yield |
| 1 year | 4.57% |
| 5 years | 6.19% |
| 10 years | 6.88% |
| 30 years | 7.44% |
Source: Investing.com
The longer the duration, the higher the yield. Government bonds start to become more expensive than mortgages from the 10-year term.
So what is the reason for this?
The explanation is simple: demand and supply.
Right now the government has a much bigger borrowing program, which means it has to make it more lucrative to buy its bonds by offering higher yields.
Since the COVID-19 pandemic, the Indian government has borrowed nearly ₹25,000,000, and it has a budget to borrow ₹11.6,000,000 again next year.
Once the market absorbs these bonds and the supply decreases, these yields will begin to fall.
On the other side, the Reserve Bank of India improved liquidity in the system when the pandemic hit, but borrowing did not increase enough. Banks therefore struggled to find ways to take advantage of the extra liquidity, and home loans were one of the avenues they explored by offering attractive interest rates.
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