State Bank of India (SBI) has announced home loans at the rate 8% for new borrowers. This is the cheapest home loan available in India now. State Bank (SBI) said in a press release that the 8% offer will last for a year.

For one year, the interest rate will be frozen at 8%. After one year, these home loan borrowers must pay the earlier contracted rate which in the case of special scheme borrowers will be 8.5% for loans up to Rs 5 lakh and 9.25% for loans up to Rs 20 lakh. The new SBI home loan interest rate, which is the cheapest among Indian banks, will be offered between February 2 and April 30, 2009, SBI said in a press release. Those who wish to apply for these loans should get their loans sanctioned before April 30.

Existing home loan customers can also make use of this cheap 8% home loan rate scheme, subject to conditions. For them, it will be only for 10% or Rs 5 lkah. The scheme is called SBI Lifestyle Loan.

Currently, most private sector banks charge home loan interest rates between 9.75% and 13%. Though India’s central bank RBI has aggressively reduced interest rates over the last months, banks have been reluctant to cut home loan rates and help spur lending and spending.

The Indian government and the central bank RBI have been trying to stimulate borrowing and spending by reducing interest rates. The cheapest home loans from State Bank is thus part of an effort to push up lending and borrowing. Since SBI is the largest bank in the country, an interest rate cut on home loans to 8% by SBI is expected to spark similar moves by other banks and thus enhance credit flows. If the SBI loan scheme turns out to be a success, other government-owned banks too may plumb for the 8% rate sop.

However, many feel that an interest rate cut alone wont help stimulate home purchases. This is becase despite a fall in prices, houses in many metros are still priced too high for retail house buyers. Unless the real estate prices come down, they feel, cheap home loan rates wont be of much use.

The SBI chairman has also hinted at the possibility of further lowering the interest rates. The RBI governor too had indicated a “downward bias” in interest rates during the quarterlt monetary policy review last month. At a meeting with the finance secretary in New Delhi on Monday, heads of public sector banks also agreed to reduce home loan interest rates soon.