New home loan rules to amplify real estate sales

New home loan rules to amplify real estate sales

On 9th Oct 2020, the RBI has reshuffled rules for new home loans to support the real estate market. Under the current regulations, differential risk weights apply to individual home loans based on the loan’s size and the loan-to-value ratio (LTV).

The chief of RBI stated that to help the real estate sector, seeing its role in economic and employment development, RBI has decided to make some changes. One such change links home loan value to LTV ratios only for all new housing loans sanctioned until March 31, 2022, and rationalizes the risk weights.

 He also mentioned that this measure would offer a boost to the real estate market. This move will help borrowers get more credits, especially for high-value properties.

LTV is the value of the property a bank will lend to the borrower. The bank will have to make more provisions and the capacity of the banks’ to lend is limited, if the risk weights increase.

Chairman & Managing Director of Knight Frank India, Shishir Baijal, mentioned that RBI had taken some constructive steps. Rationalized the risk weights to all new housing loans until March 2022 would give a fillip to housing loan growth. The RBI has also extended the co-financing scheme to all NBFCs and HFCs, facilitating credit availability to the real estate sector.

Key interest rates have been unchanged while maintaining an accommodative monetary policy stance supporting the RBI’s coronavirus-hit economy.

Benefits to Home Buyers

  • The RBI decision would have a positive effect on homebuyers seeking loans as it is now estimated that the amount of loans to be extended.
  • For new housing loans, the RBI is encouraging banks. It would be easy for banks to expand loans to large and small properties.  
  • The relevant risk weightage would be 35 percent at 80% LTV. The relevant risk weight would be 50% if the LTV is between 81-90 percent.
  • Instead of the size of loans, the loan-to-value ratio will determine the risk weight of home loans. 
  • This will be applicable to all new loans sanctioned till 31 March 2022.

As speculated by most analysts and experts, the RBI kept the repo rate unchanged at 4 percent. It also preserved the accommodative position while maintaining the MCLR and repo rates unchanged. The central bank would uphold its accommodative position at least for this financial year and more until economic stability is achieved.