Axed Home loans

Recently, the home loans market is witnessed shift as the Reserve Bank of India (RBI) made efforts to tame inflation. After withdrawing their teaser loan schemes earlier, the leading banks have hiked prime lending rates and their floating rates, particularly for their existing customers.

However, since the principal burden is higher during the initial years the overall cost of borrowing was lower to that extent. With the interest rates moving up on the back of periodic RBI moves to increase repo rates and reverse repo rates, the mortgage rates have already moved up by an average of 150 bps over the last 12 months caused the axing of the teaser home loans.  Also, recently the Loan-To-Value in home mortgages being capped at 80% by RBI, home buyers will have to fork out 20% of the capital cost. Hence, the total cash burden in the initial years would substantially go up for the buyers. Secondly, the axing will bring about greater transparency in the system of dispersing loans.

The developers, however, maintain that such moves, even though beneficial for home buyers, will not have any significant impact on the realty market. Manoj John, Vice-President, Corporate Planning and Strategy, RNA Corp, says, “The move will have somewhat negative impact in the form of higher EMIs.

The teaser home loan scheme was very beneficial to a home buyer as it was introduced during a time when the economy was recovering.

Uday Dharmadhikari, CEO, , also quoted that “Teaser home loans initially are very enticing since they offer loans at low interest rates for the first two years of the tenure. Though there will be a little change in the consumer confidence, though the discontinuation of such loans will seldom affect home buyers. When the rates rise in the third year, the home owner will have to restructure finances since a rise in interest rates will mean increase in the EMIs.”

These schemes were good for those with mid-size budgets or lower income bands providing some relief on their cash flows for the first few years, allowing customer to buy their dream home.

According to realty experts, doing away with the teaser rates is a prudent move for the current situation, keeping in mind the overall asset price inflation and increasing interest rate. “Though the discontinuation of teaser loans may lower home buyer confidence but will bring in more clarity and there could be possibility that floating rates may benefit buyers in the long run”, says Shailesh Sanghvi – Director, Sanghvi Group.

If developers and realty experts are to be believed then the home loans market in India will continue to grow “selectively” though it may witness some dip. Also, the consumer in recent times has become more conscious of recent instance of malpractice in lending to a few real estate companies. The mortgage penetration in India is still far lower than most developed economies and the home loan markets remain robust.