Step in your Dream Home with Easy Home Loans
Step in your Dream Home with Easy Home Loans
Home hunters are in a spot. While real estate prices are not showing any signs of easing (in fact, they have started hardening again), the Reserve bank of India (RBI) has chosen to tighten a few norms for home loans, adding to borrowers' woes. In its recent policy review, RBI has taken three steps that will adversely impact prospective home buyers who are dependent on home loans.
To begin with, the loan-to-value ratio has been lowered to 80% from 85%. This means that you can borrow only up to 80% of the value of the property that you plan to purchase. The remaining 20% has to be funded out of your own/family savings. Secondly, RBI has also increased the standard asset provisioning requirements to 2% for all the teaser rates offered by scheduled commercial banks.
RBI on teaser loan rates
Teaser loan rates typically offer loans at a fixed rate for the first three years and then move on to the floating rate. The fixed rate is as low as 8-9%, which is fairly insulated from the rate swings at least in the first three years. These loans were a boon to customers who typically finish their repayment within 5-7 years.
RBI's stance on this issue is: "This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective."
The central bank has also noted that at the time of initial loan appraisal, many banks do not take into account the repaying capacity of the borrower at the normal lending rates. This is the reason why the central bank has increased the risk weight for residential housing loans, of Rs 75 Lac and above, to 125%.
Impact of stricter norms
Even as banks, developers and housing finance companies are in the process of digesting these measures, financial advisors have welcomed these steps, saying the customers will now have to take more prudent financial decisions.
"Homebuyers often overshoot their budget aspiring for a bigger house. They bank on their future salary hikes and borrow up to even 80% of their take-home salary. In terms of financial planning, these measures are to be lauded. Also, every borrower should examine his repaying capacity rather than his loan eligibility," says Pankaj Mathpal, a Mumbai-based certified financial planner.
Loan-to-value ratio
The measure, which has a direct impact on homebuyers, is the low loan-to-value ratio. Earlier, on a Rs 50-Lac loan, you will have been eligible to borrow Rs 42.5 Lac or even more in certain cases. As per the new stipulations, you will be eligible to apply home loan only for Rs 40 Lac. "Certain Southeast Asian Economies such as Thailand and Singapore started regulating loan-to-value ratios because of an asset bubble in the real estate market. The RBI is anticipating a similar situation here. There is no way a borrower can mitigate the impact of lower LTV.
Amar Pandit, certified financial planner, My Financial Advisor, adds, "Clearly there is an asset bubble and the property market, especially in the metros, is overheated. Hence, RBI is justified in protecting home loan borrowers. It wants to avoid a scenario where over-leveraged borrowers may be staring at lower security cover if the property prices start falling."
What is loan-to-value ratio
Let us assume you have borrowed Rs 90 for a property valued at Rs 100. While you are repaying the loan, if the property value dips to Rs 80 at any point of time, banks can ask for additional collateral. This is because they should have lent only Rs 72 as per the loan-to-value ratio.
At this point of time, you have to provide additional collateral or pay the extra margin money. If you are not in a position to pay up the extra cash/collateral, the bank can categorise you as a defaulter. This is clearly mentioned in the home loan agreement.
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