With banks axing teaser loans and the recent instance of malpractice that made headlines,RAJIV DOGRA reports on what the future holds for home loans
The home loans market is witnessing a tectonic shift as the Reserve Bank of India (RBI) makes efforts to tame inflation.After withdrawing their teaser loan schemes earlier,some of leading banks have now started to raise rates,specifically for their existing customers.Also,most of the prominent banks have hiked prime lending rates and their floating rates either by 50 or 75 basis points (bps).
There are,however,two connotations to the axing of the teaser home loans.First,since the principal burden is higher during the initial years,the teaser home loans allowed some relief to the home buyers.The overall cost of borrowing was lower to that extent."With the scheme being axed,this cost will now inch up by 75 to 125 bps,"says Amit Goenka MRICS,National Director - Capital Transactions,Knight Frank (India) Pvt Ltd."With the interest rates moving up on the back of periodic RBI moves to increase repo (the rate at which banks borrow from RBI) and reverse repo rates,the mortgage rates have already moved up by an average of 150 bps over the last 12 months.
Also,recently the Loan-To-Value (LTV) 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.So,to that extent it is double whammy which will limit the ability of consumers to buy their desired homes."Second,the axing will bring about "greater transparency" in the system of dispersing loans."With teaser rates,the average home buyer could not distinguish between the various loan offerings and ended by being swayed by the lower teaser rates,"he adds.
The developers,however,maintain that moves such as scrapping the teaser loan scheme,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 equated monthly installments (EMIs).But the actual payout if we see,it may not be much.So for a rise from 8.5 to 9.5% calculates to Rs 64 raise on Rs 1 lakh,which means on a loan of Rs 60 lakh it works up to Rs 3,840 per month."
He adds,"The scheme was absolutely beneficial to a home buyer as it was introduced during a time when the economy was recovering,thus helping build customer confidence and providing impetus to residential market."
Agrees Uday Dharmadhikari,CEO,Usha Breco Realty,"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."
The teaser home loans were regarded good for those with mid-size budgets or lower income bands since it provided some relief on their cash flows for the first few years."That allowed the mid-size consumer to buy their dream home and back end payments on the back of increasing income,"says Goenka.Also,with intense competition,the consumer was able to shop for the most aggressive teaser rates while factoring the overall cost of borrowing."To that extent it was a beneficial scheme.But for the entire home buyer community at large especially in metro cities,the teaser rate schemes may not be entirely beneficial since the ticket sizes are large and hence the overall cost of borrowing and not just the teaser rates are important,"he adds.
According to realty experts,keeping in mind the overall asset price inflation and increasing interest rates,doing away with the teaser rates seemed like the "prudent move"for the current times."It brings all buyers to parity and allows them to uniformly judge the offers and take a conservative view on their own income status,"says Goenka.
Says Shailesh Sanghvi - Director,Sanghvi Group,"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."
So,what does the future of home loans market in India hold If developers and realty experts are to be believed then it will continue to grow "selectively" though it will witness some dip.Says John,"Growth will be observed in price segments that are customer friendly and in geographical micromarkets that are witnessing reasonable property price appreciation.
Also,at a perception level,the consumer has become conscious of recent instance of malpractice in lending to a few real estate companies... but that would not negatively impact the real estate demand."Adds Goenka,"The mortgage penetration in India is still far lower than most developed economies and the home loan markets remain robust.However,currently there seems to be a pull back from consumers in entering into mortgages.
This is due to the huge price jumps witnessed in home assets over the last 12 months which have again taken the prices away from affordability keeping the home loan consumers at bay.Also,with the LTV on mortgages being brought down and the interest rates constantly rising,the overall cost of ownership has gone up substantially.This will continue to cause some dip in the home loan markets."
The developers,however,remain optimistic that banks would devise policies and schemes that would prove beneficial to the realty sector."We are confident that financial institutions will come with an innovative scheme in a bid to make home buying affordable across income groups,"says Sanghvi.Seconds Dharmadhikari,"There is a possibility that banks may come up with something better in the future so that home buying can become easier and affordable.""All in all,the home loan markets continue to be flattish with potentially some cautious optimism for the medium term,"sums up Goenka.
