One of the two largest home loan lender ICICI Bank has given a New Year gift to its borrowers. The bank has cut its home loan rate by half a percentage points to 11% for loan up to Rs 20 lakh and to 12.50% for loan more than Rs 20 lakh. Despite the cut in the rate, the home loan offered by the bank will be costlier than its rival HDFC Ltd and other public sector banks.

The bank on Wednesday has cut its floating reference rate by 50 basis points to 13.75% from 14.25%. The bank has also cut its deposits rates by up to 75 basis points. In August 2008, the bank had increased its home loan rates by one percentage point. This is the first time the bank has responded to the liquidity infusion by RBI in last three months.

Public sector banks like State Bank of India, Punjab National Bank, Union Bank of India and others have already cut their lending rates by up to 150 basis points since RBI infused liquidity in the financial system. The home loan rates offered by large government-owned banks like SBI, PNB, UBI and Bank of Baroda vary between 9.5% and 11%. HDFC Ltd, the second largest player in home loan market, has also cut its rate by half a percentage point to 10.25% for loan up to Rs 20 lakh and 11.25% for loan more than Rs 20 lakh. In fact, HDFC Ltd had not increased its rates as sharply as ICICI Bank when RBI had tightened the liquidity in the system during initial months of 2008. That is why, HDFC's home loan product is cheaper than that of ICICI Bank. The rate cut will benefit the existing customers too as it will be passed on to them also.

It will reduce the EMI of a 20-year loan by Rs 35 per lakh to Rs 1,136. That means, on a Rs 50 lakh loan for 20 years, the EMI will come down by 3% or Rs 1,772 to Rs 56,807. But, if somebody wants to continue to pay the same EMI and reduce the tenure of the loan repayment, the fall in the interest rate by half a percentage points from 13% to 12.5% will lead to reduction in the period by 28 months. But as the bank has kept its home loan rates higher than other banks, clearly suggests that it would not like to be very aggressive in home loan segment. Till early 2007, ICICI used to offer home loan at one of lowest rates. But, later it changed its focus as liquidity situation tightened in the money market.