Home Loans: RBI makes high-value loans possible at lower rates

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Planning to get your dream house? RBI is here with its Home Loans at a reasonable rate. On Friday, the Reserve bank of India (RBI) said that it will rationalise the risk weights and link them to Loan-to-Value (LTV) ratio for new housing loans sanctioned up to 31st March 2022. This step is taken by the apex bank to make the home loans cheaper.

The central bank said, “Recognising the criticality of real estate sector in the economic recovery, given its role in employment generation and the inter-linkage with other industries, it has been decided, as a countercyclical measure, to rationalise the risk weights by linking them only with LTV ratios for all new housing loans sanctioned up to 31st March 2022.”

Dhruv Agarwala, group chief executive officer (CEO) of Housing.com, Makaan.com, and Proptiger.com said that “Rationalising risk weightage on home loans and linking it to Loan to Value (LTV) ratio will effectively result in higher credit flow to the real estate sector, which is positive news for the sector.”

Home Loans: RBI makes high-value loans possible at lower rates
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Hardayal Prashad, MD, and CEO, PNB Housing Finance said, “This move by the central bank addresses the urgency required to boost the real estate sector in the country. Home loans will become accessible and competitive for customers.”

For making things clear, Loan-to-value (LTV) ratio refers to the proportion of the property value that a lender can borrow through a loan. Lenders set the LTV ratio for a loan applicant after factoring in his credit profile and the regulatory caps for the concerned loan typeset by the regulator.

Nishant Singh, partner, IndusLaw explained things: For instance, if a bank underwrites a home purchase of Rs 1 crore wherein a home buyer foots Rs 20 lakh; and the bank chips in Rs 80 lakh (value of the loan) divided by Rs 1 crore; (cost of the home purchased). So, the LTV would be 0.8. If the LYV increase, the banks’ risk exacerbates.

The central bank i.e. RBI prescribed the risk weightage on a home loan based on its size. The bank must maintain 35% of the regulatory capital if the loan amount is up to Rs 30 lakhs. If the loan amount is higher than Rs 30 lakh; but does not exceed Rs 75 lakh, the bank is required to have the capital provision at 50% of the loan value. When the loan amount exceeds Rs 75 lakh, the bank needs the capital provision at 75% of the loan amount.

At present, the risk weights are linked to the size of the loan; as well as the loan to value (LTV) ratio. The central has allowed banks more room to lend to borrowers; for high-value properties by removing the loan size from the equation.

Anuj Puri, chairman, ANAROCK Property Consultants explained that “The risk weightage assigned to LTV will free up banks’ capital; for additional lending. It will also help them to bring down the lending rates because; they will have spare capital to lend.”

He clarified ahead saying “For the lower loan ticket size, where the bank’s capital requirement; may go up depending on the LTV for a specific loan; it will provide better risk coverage to the bank. From the regulatory side; the LTV of a home loan book will reveal its real risk characteristics. Overall, when the home loans’ risk weightage is pegged to the LTV; it will mutually benefit the lenders and the borrowers.”


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