Make mortgage loans cheaper, the Reserve Bank of India said on Friday it would rationalize risk weights and link them to loan-to-value ratios (LTVs) for new home loans sanctioned until March 31, 2022. immovable sector in the economic recovery, given its role in job creation and interconnections with other industries, it was decided, on a counter-cyclical basis, to rationalize the risk weights by linking them only to the LTV ratios for all new housing loans sanctioned until March 31, 2022, “the central bank said on Friday.
“The rationalization of the risk weighting on mortgages and its link to the Loan to Value (LTV) ratio will effectively lead to an increase in credit flows to the real estate sector, which is positive news for the sector,” said Dhruv Agarwala, Managing Director) of Housing.com, Makaan.com and Proptiger.com.
“This central bank move responds to the urgency required to boost the real estate sector in the country. Home loans will become accessible and competitive for customers,” said Hardayal Prasad, Managing Director and CEO of PNB Housing Finance.
What this means for mortgage borrowers
The loan-to-value ratio (LTV) refers to the proportion of the property’s value that a lender can borrow through a loan. Lenders set the LTV ratio for a loan applicant after taking into account their credit profile and the regulatory ceilings for the type of loan concerned set by the regulator. For example, if a bank subscribes to the purchase of a house of ₹1 crore in which a home buyer walks ₹20 Lakes and bank tokens in Rs. 80 lakes. Then the LTV would be Rs. 80 Lacs (loan value) divided by ₹1 crore (cost of the house purchased). So the LTV would be 0.8. If the LTV rises, the bank’s risk increases, explained Nishant Singh, partner, IndusLaw.
The central bank has prescribed the risk weighting on a mortgage loan according to its size. The bank must maintain 35% of regulatory capital if the loan amount ₹30 lakes. If the loan amount is greater than ₹30 Lakes but does not exceed ₹75 Lakes, the bank is required to have a capital allowance at 50% of the loan value. When the loan amount exceeds ₹75 Lakes, the bank needs the capital provision at 75% of the loan amount.
Currently, risk weights are linked to the size of the loan as well as the Loan to Value (LTV) ratio. By removing the loan amount from the equation, the powerhouse gave banks more leeway to lend borrowers for high-value properties.
“The risk weight assigned to LTV will free up bank capital for additional loans. It will also help them to lower lending rates as they will have reserve capital to lend, ”explained Anuj Puri, president of ANAROCK Property Consultants.
“For the smaller loan ticket size, where the bank’s capital requirement may increase depending on the LTV of a specific loan, this will provide better risk coverage for the bank. On the regulatory side, the LTV of a mortgage portfolio will reveal its real risk characteristics. Overall, when the risk weight of home loans is tied to the LTV, it will mutually benefit lenders and borrowers, ”Singh said.
“With reduced risk weights for loans greater than ₹75 lakh, the cost of lending to this customer segment will drop for lenders as they will have to set aside less amount of principal for such loans. Therefore, lenders are likely to pass the benefits on to this customer segment by reducing lending rates for loans above. ₹75 lakh, ”said Ratan Chaudhary, Head of Home Loans, Paisabazaar.com.
“Streamlining risk weights would result in reduced provisioning needs for borrower financing for mid and high value properties by lenders,” said Gaurav Pawra, CEO – Housing Finance, Clix Housing Finance Ltd.
“With the new risk weights announced yesterday by the RBI, the value of the loan has been decoupled to determine the risk weights. Banks’ capital requirements would decrease due to the lower risk weighting based on LTV. it all depends on the bank’s risk appetite, ”said Divakar Vijayasarathy, Founder and Managing Partner, DVS Advisors LLP.
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