Gone are the days when you could walk into a bank and walk outwith an instant home loan. Banks and financial institutions havestarted feeling the heat of the real estate market, which meansbuyers will have to dig deep into their resources to fund their newhomes. Worries over rising defaults in home loans, coupled withsoaring interest rates, have prompted banks to tread cautiously onthis turf for now. Says Amar Pandit, Director, My Financial Advisor:With the world's financial markets in turmoil, following a crisis inthe US mortgage lending sector, bankers in India are wary when itcomes to assessing home loan applications. For them, the ability ofborrowers to pay is paramount.
Winds of change
Banks and housing finance companies (HFCs) have raised thefinancing margin for home loan borrowers, and borrowers now have tomake higher down payments on loans. Says Harpreet Singh, BusinessDirector (Wealth Management, Distribution & Loans), Centurion Bankof Punjab: Banks have cut down the ceiling on maximum loanavailable to 80 per cent of the total value of the property from theearlier level of 85-90 per cent. For example, Punjab National Bank(PNB) is financing up to 75 per cent of the purchase value of aproperty compared to 85 per cent earlier.Similarly, Union Bank ofIndia (UBI) will finance up to 80 per cent for all fresh sanctionsof housing loans against 85 per cent earlier. Another reason thebanks are wary is the expected correction in property prices. Realestate prices have increased by about 50-60 per cent over the lastone year. Going forward, we could see a correction of around 20-25per cent in prices over the next few months. As a result,transactions are going to be hit very badly, says Singh.
Reality bites
How the housing finance scenario has changed over the last twoyears.
Then
Margins: Down payments ranged from 10-15 per cent and, in somecases, banks were willing to finance 100 per cent of the loan amount
Interest rate: The rate of interest hovered in 8-9 per centrange; a few good borrowers could negotiate even lower rates
Fixed versus floating: The differential between a fixed and afloating rate home loan was about 100-200 basis points
Top-up loans: This form of loan came easy as buyers could top-uptheir existing loan by about 20 per cent; ideal for furnishing yournew home or tide over an emergency at cheaper rates Now
Margins: New home buyers have to shell out about 25 per cent ormore as down payments as banks have tightened their lending normsfearing a correction in realty prices
Interest rate: The current floating interest rate has inched upto about 11 per cent, while rate negotiations with banks are astrict no-no
Fixed versus floating: The rate differential between a fixed andfloating rate now stands at about 250-300 basis points, making fixedrates more expensive
Top-up loans: Banks have been forced to cut back on top-up loansfor new buyers due to the shrinking loan-to-value ratio Normally,when a bank finances a home, it calculates the current market valueand gives a loan on the basis of exposure (say 80 per cent of thetotal value) it wants to have in that property. If tomorrow, theprice of property goes down, and the bank wants to keep its exposureat the same level (80 per cent), it will ask the borrower to pay therest from his/her pocket, he adds.Currently, home loan rates arehovering between 10.5 and 12.5 per cent. Industry watchers believethat every rise in rates from here on will make loan repayment moreburdensome even with the extended loan tenures. Monetary measureslike the CRR (cash reserve ratio) hike will certainly push home loanrates upward, making it difficult for borrowers, says HarshRoongta, CEO, Apnaloan.com. No wonder, the last few weeks have seenbanks reducing the cap on debt service ratio (DSR) of borrowersbefore approving home loans. This will give banks a clear idea ofwhether a person will be able to afford a loan or not. When the DSRis low, there can be room for increasing the EMI (equated monthlyinstallment) to cover any rise in interest rates. An amount (EMI)higher than 50 per cent of your take-home is a clear indication thatyou could be heading for trouble, especially in the current scenarioof rapidly rising interest rates, says Singh.
Going slow
Home loan disbursements, as a result, are expected to slow down.Egisto Franceschi, CEO, Wizard Home Loans, thinks growth in homeloans has been slowing this year. It is expected that the marketwill grow at around 10-11 per cent this year compared to around 14per cent a year ago due to rising interest rates and the growingbase of borrowers, says Franceschi, adding that a borrower'screditworthiness remains the primary consideration in determiningloan eligibility. Other factors taken into account include incomelevel, credit history and repayment ability. We follow robust SixSigma processes to understand customer needs and structure the dealin such a way that the consumer is comfortable and understands hispayout, adds Franceschi.
At current rates, home loans are the cheapest form of retailcredit. A top-up loan is another name for a personal loan given tohome loan borrowers at the prevailing home loan rates, which isusually backed by the property's rising values. It is a usefulemergency funding line for individuals. Banks usually lend up to 20per cent of the disbursed value of the home loan after one year ofrepayments.
However, as the overall market sentiment is turning negative,most players in the banking space are either reducing this cap orclamping down on top-up loans entirely. Today, banks and HFCs aretrying to minimise their topup loans lending, and, at the same time,are advising individuals to evaluate their options well whileutilising the top-up loans already taken from the banks, saysSingh.
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