Banks and housing finance companies are planning to flood the home loan market with new structured products to take on ABN Amro Bank, which announced on Monday 6 per cent home loan for first year and 6.5 per cent second year.

The pressure is mounting on other housing finance majors to drop the average industry interest rates of 7.75-8.25 per cent as they will not be able to command a premium of 200 basis points over ABN Amro's offer.

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"Loans will need to be re-priced in some manner or the other. Those who cannot match the price will come out with new structured products," said officials at a leading housing finance major.

"Pressure will be on the current market interest rates, which are already at rock-bottom. It will be difficult to match these rates looking at the cost of funds but we plan to come out with more structured products," said LIC Housing Finance Ltd director and chief executive S C Jain.

Structured products offer the customers facility of step-up, step-down and balloon repayments facilities. Interest rate goes up progressively in a step up product while step-down product offers a progressive low rate and balloon repayment offers customers an opportunity to pay a lumpsum at one go.

"To stay in the market, we need to be competitive and this is only possible by offering more innovative products," said Jain. However, others feel that new players will continue to offer marketing gimmicks to capture a share of the market.

ABN Amro chief executive officer Romesh Sobti said: "Curiosity level has been raised and a lot of healthy enquiries have started coming in. The response has been as per our expectation." The foreign bank is targeting the customer sitting on the fence waiting for further cut in interest rates, Sobti added.

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Housing Development Finance Corporation can lower rates as it has comparatively low marginal cost of funds ranging between 5.5 to six per cent. However, at this point of time there is no decision at HDFC in terms of any immediate reaction to ABN Amro's promotional offer. 

Housing finance majors are looking at offering structured loan products, which offer step up of the equated monthly installment and further customisation of home loans to suit customers' ability to pay.

LICHFL had initially explored a structured product wherein in the initial years only the interest on the loan would be payable and thereafter the principle as well. "We will now need to come out with better offers," said Jain.