Looking for a home loan of ₹75 lakh or above? The RBI rate hike pause might not bring you relief

• Loans of ₹75 lakh and above to have a risk weightage of 50% up from 35% earlier.
  
  
• This could lead to an increase in home loan interest rates for home loans of ₹75 lakh and above.
  
  
• Homebuyers should review their finances and evaluate their ability to make a higher down payment.
  

Those looking to take a home loan of ₹75 lakh or more, brace themselves to fork out a higher EMI on your loan.

On October 12, 2020, the Reserve Bank of India revised the risk weights for individual housing loans by connecting them with the loan to value (LTV) ratios for all new housing loans authorized until March 31, 2022. It said that all individual housing loans shall attract a risk weight of 35%, if their loan-to-value ratio is at 80% or lower.

Earlier, in June 2017, the Reserve Bank of India had implemented a staggered risk weights system for individual housing loans that varied according to the size of the loans. In case of home loans above ₹75 lakh, the risk weights were set at 50%. Post-October 12, 2020, even for loans for ₹75 lakh and above, the riks weight ratio was 35%.

In April 2022, RBI proposed to extend the lower risk weights on home loans for another year till March 31, 2023. However, there has been no further extension.

“The most recent Economic Survey stated that housing prices have started to firm up after a two-year Covid lull and unsold inventories have declined on the rise in demand. So there are no further extensions to the lowered risk weights,” says Adhil Shetty CEO, BankBazaar, an online financial services marketplace.

“Overall, risk weights are an important factor in determining the amount of capital that banks need to hold against their assets. However, their impact on home loan pricing may be less significant compared to other factors such as creditworthiness, loan-to-value ratios, and prevailing market conditions,” says Shetty.

Financial institutions like banks use the technique of risk weightage on loans to calculate the level of capital that they need to keep in reserve for a specific loan or set of loans.

The risk weightage of a loan, which is a measure of the perceived risk of default, affects loan pricing and availability. When loans are assigned a higher risk weightage, it requires more capital to be held against them. Loans with higher risk weightage are priced higher to compensate for the increased cost of capital, resulting in higher interest rates or fees for borrowers.

Furthermore, higher risk weightage can limit access to credit for certain borrowers as lending institutions may be less willing to extend loans to borrowers who do not have a good credit history.

The impact on high-value home loans: The risk weight ratio thus gains importance, especially in the case of high value loans.

“Changes to risk weightings and LTV ratios can affect the lending practices of financial institutions and may impact the availability and cost of credit for borrowers. A higher risk weighting may make it more difficult or expensive for borrowers to obtain loans, especially for more expensive homes,” says Prashant Thakur, senior director and head of research, Anarock Group, a real estate consultant firm.

Increasing the risk weighting from 35% to 50% for LTV ratio less than 80% means that banks will have to hold more capital against these loans, which may make the cost of capital more expensive for them to offer mortgages.

“This, in turn, could lead to an increase in interest rates for borrowers, including those seeking to purchase houses priced at ₹75 lakh and above,” says V Swaminathan, executive chairman, Andromeda loans, a loan distributor.

This will mean the costs of owning property will go up. High interest rates mean that the EMI per lakh goes up. For a 20-year loan, the EMI per lakh has gone up by 20%+ from ₹775 to ₹932 per lakh. Higher interest rates would mean that this EMI could go up even further.

If someone does not have the capacity to pay high EMIs, the loan tenure for a high value loan could exceed 50 years, so one needs to be prepared to shell out a higher EMI.

What it means for borrowers: Borrowers will have to be prepared to shell out more from their own savings and depend less on borrowings.

“Homebuyers should review their finances and evaluate their ability to make a higher down payment. They should ensure that they have enough savings to cover the down payment and other associated expenses of home buying,” says Swaminathan.

To evaluate your home loan repayment capacity, you need to consider factors such as your income, monthly expenses, existing loans, credit history, and down payment.

By using a home loan EMI calculator, you can estimate your monthly EMI based on the loan amount, tenure, and interest rate. Considering these factors will help you choose a home loan that fits your budget. This also makes it more important to have a good credit score to get a loan on favourable terms.

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