The Home Loan Anomaly

2/12/22, 11:11 PM The Home Loan Anomaly
Finshots Share this

SUBSCRIBE
10 FEBRUARY 2022 / BUSINESS
The Home Loan

Anomaly
In today’s Finshots, we see why home loans are

quoting at their lowest rates in 20 years while
the government continues to borrow at a much
higher rate
https://finshots.in/archive/the-home-loan-anomaly/ 1/9
Finshots
Business Share this
The Story
Try and google “best home loan rates” right now.
You’ll most likely see adverts promoting home
loans at a measly 6.7%.
But if the government wants to build a house and

needs to borrow money from outside investors,
they’ll have to cough up an interest rate of 6.9%*
or higher.
That’s right, the government, an entity that’s

considered to be virtually risk-free has to pay
more money than a homebuyer. Pretty crazy,
right?
Before you jump at our throats and say, “Hey

Finshots, your comparison has flaws”, well, let’s
be clear, this does come with a few caveats. The
interest on your home loan is 6.7% today. But
there’s no guarantee that it’ll stay the same for the
entire tenure. Granted, you could get yourself a
home loan with a fixed interest rate, but then it’s
Finshots
likely going to cost a lot more than just 6.7%. The
Share this
government however has to worry about no such

thing. If they’re borrowing at 6.9% they’ll only
have to pay this much and not a penny more.
But let’s set aside this for a moment. Let’s assume

that there are no caveats here. Then, you must
ask — why is the government borrowing at
relatively high rates?
Well, to understand this bit, you’ll have to know

how the government borrows money in the first
place. The government primarily earns money by
levying taxes. And they spend this money on a
wide variety of programs. However, in a growing
economy, the government is often forced to spend
more than it earns. There’s almost always a
mismatch between its earnings and the expenses.
So the government borrows this extra money
from outside investors in a bid to bridge the gap.
And each year, the government outlines its
borrowing program in the Union Budget.
Finshots
Once it’s made public, the onus shifts toShare
the this
government’s banker — the RBI. It’s the RBI that
helps the government borrow money. And the
RBI does this by issuing bonds. Think of bonds as
formal “IOU” notes — a promise to repay the loan.
And depending on the tenure (1-year or 10-year
or something else) the RBI auctions the bonds to
potential investors — which includes banks,
mutual funds, insurance companies etc.
Now that we’ve cleared that up, let’s see why the
government’s borrowing rate is so high.
Well, long story short, they’re borrowing too

much.
Covid brought the economy to a standstill, and

the government couldn’t earn as much as it would
have liked. Tax collections took a tumble while
expenses kept piling up. There was no other
choice. The government had to borrow. And so it
amped up its borrowing program from around
₹7.5 lakh crores in the financial year 2020 to
Finshots
nearly ₹15 lakh crores for the financial year
Share 2023.
this
As you can see, that is a lot of money. And when

you’re seeking these kinds of funds, investors will
have to be slightly sceptical. After all, there is only
so much money floating around. So they’ll start
asking for a higher sum to compensate for the
added risk involved. And that’s kind of the
situation here.
In fact, the RBI only recently cancelled a bond

auction citing that the government has enough
Finshots
money lying in its accounts for now. So maybe
Share this
they’re trying to get themselves a better deal this

way. Rope in that interest rate.
Elsewhere, the RBI has also been cutting interest

rates in a bid to make funds accessible to banking
institutions across this country. They’ve also been
injecting money into the banking system using
dark methods only available to the central
banking institution. Actually, that’s a joke. But
you get the point, right?
Anyway, the hope was these surplus funds would

help individuals and businesses to borrow money
easily during such desperate times. However,
considering corporate India was a bit spooked to
borrow money with all the uncertainty floating
around, surplus funds kept piling up. At one point
banks held nearly ₹6 lakh crores.
So since businesses were reluctant, banks turned

to the next best thing — home loans. After all,
home loans are considered to be one of the safest
Finshots
lending bets for banks and they have theShare
lowest
this
default rates — including collateral — an actual

house. And since real estate prices have
moderated after years, homebuyers are excited
about future prospects.
So there’s an intense battle brewing on the

horizon. Every bank wants to entice new home
buyers to borrow money and they’re offering
them the most attractive rates on the market.
And there you have it. Now you know why you’re
able to borrow money at rates lower than the
government.
Until then…
Don't forget to share this article on WhatsApp,

LinkedIn and Twitter
*It’s technically called the yield and the 6.9%

figure is quoted for a 10-year government bond
Finshots

Share this
Join 5,00,000+ Subscribers
Enter Your Email address
SUBSCRIBE
Be a part of our ever growing community.

Join us on
Twitter
— Finshots —
Archive
Has Apple finally cracked

the Indian market? Has Apple finally
cracked the Indian
Will short videos save Meta? market?
An explainer on how Apple
cracked the Indian market
Shark Tank, a fintech
founder, and a banking
licence
11 February
y
Finshots See all posts → 2022 Share 3
this
MIN READ
Will short videos save Meta?

An explainer on how Meta can leverage short-form videos to gain an
advantage
9 February 2022 3 MIN READ
Checkout Ditto - Insurance Made Simple Made with ❤️in India

The Home Loan Anomaly

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Home Loan Anomaly

Uploaded by

Copyright:

Available Formats

2/12/22, 11:11 PM The Home Loan Anomaly

Finshots Share this

10 FEBRUARY 2022 / BUSINESS

The Home Loan

In today’s Finshots, we see why home loans are

But if the government wants to build a house and

That’s right, the government, an entity that’s

Before you jump at our throats and say, “Hey

government however has to worry about no such

But let’s set aside this for a moment. Let’s assume

Well, to understand this bit, you’ll have to know

Well, long story short, they’re borrowing too

Covid brought the economy to a standstill, and

As you can see, that is a lot of money. And when

In fact, the RBI only recently cancelled a bond

they’re trying to get themselves a better deal this

Elsewhere, the RBI has also been cutting interest

Anyway, the hope was these surplus funds would

So since businesses were reluctant, banks turned

default rates — including collateral — an actual

So there’s an intense battle brewing on the

Don't forget to share this article on WhatsApp,

*It’s technically called the yield and the 6.9%

Join 5,00,000+ Subscribers

Enter Your Email address

Be a part of our ever growing community.

Has Apple finally cracked

Will short videos save Meta?

9 February 2022 3 MIN READ

Checkout Ditto - Insurance Made Simple Made with ❤️in India

You might also like