Home hunters are in a spot. While real estate prices are not showing any signs of easing (in fact, they have started hardening again), the Reserve bank of India (RBI) has chosen to tighten a few norms for home loans, adding to borrowers' woes. In its recent policy review, RBI has taken three steps that will adversely impact prospective homebuyers who are dependent on home loans. To begin with, the loan-to-value ratio has been lowered to 80% from 85%. This means that you can borrow only up to 80% of the value of the property that you plan to purchase. The remaining 20% has to be funded out of your own/family savings. Secondly, RBI has also increased the standard asset provisioning requirements to 2% for all the teaser rates offered by scheduled commercial banks.

Teaser loan rates typically offer loans at a fixed rate for the first three years and then move on to the floating rate. The fixed rate is as low as 8-9%, which is fairly insulated from the rate swings at least in the first three years. These loans were a boon to customers who typically finish their repayment within 5-7 years. RBI's stance on this issue is: "This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective." The central bank has also noted that at the time of initial loan appraisal, many banks do not take into account the repaying capacity of the borrower at the normal lending rates. This is the reason why the central bank has increased the risk weight for residential housing loans, of 75 lakh and above, to 125%.

Impact Of Stricter Norms:

Even as banks, developers and housing finance companies are in the process of digesting these measures, financial advisors have welcomed these steps, saying the customers will now have to take more prudent financial decisions. "Homebuyers often overshoot their budget aspiring for a bigger house. They bank on their future salary hikes and borrow up to even 80% of their take-home salary. In terms of financial planning, these measures are to be lauded. Also, every borrower should examine his repaying capacity rather than his loan eligibility," says Pankaj Mathpal, a Mumbai-based certified financial planner.

The measure, which has a direct impact on homebuyers, is the low loan-to-value ratio. Earlier, on a 50-lakh loan, you will have been eligible to borrow 42.5 lakh or even more in certain cases. As per the new stipulations, you will be eligible to apply only for a loan of 40 lakh. "Certain Southeast Asian Economies such as Thailand and Singapore started regulating loan-to-value ratios because of an asset bubble in the real estate market. The RBI is anticipating a similar situation here. There is no way a borrower can mitigate the impact of lower LTV. But this regulation has been introduced only in his/her interest," says Harsh Roongta, CEO, Apnapaisa.com.

Amar Pandit, certified financial planner, My Financial Advisor, adds, "Clearly there is an asset bubble and the property market, especially in the metros, is overheated. Hence, RBI is justified in protecting home loan borrowers. It wants to avoid a scenario where overleveraged borrowers may be staring at lower security cover if the property prices start falling."

Let us assume you have borrowed 90 for a property valued at 100. While you are repaying the loan, if the property value dips to 80 at any point of time, banks can ask for additional collateral. This is because they should have lent only 72 as per the loan-to-value ratio. At this point of time, you have to provide additional collateral or pay the extra margin money. If you are not in a position to pay up the extra cash/collateral, the bank can categorise you as a defaulter. This is clearly mentioned in the home loan agreement.

Should You Wait 'N' Watch?:

Things will not change from the regulators' perspective. The lower loan-to-value ratio is here to stay. But certain pockets in metros such as Mumbai, Delhi and Bangalore can see a modest correction, hence a prospective homebuyer can wait to clinch a more affordable deal. "Certain builders, who are able to hold on to their flats to avoid selling at lower prices, will try to create an artificial supply shortage. Smaller builders will not be able to withdraw from the market on a sustained basis. These new regulations are not going to change either. Hence, I would advice homebuyers to wait until some clarity emerges," Pandit adds.

Save For Down Payment Now:

Buying a house cannot be an overnight exercise. If you are planning to postpone your home purchase, use this time to systematically cough up some funds for down payment. Maneesh Joshi, a Mumbai-based creative director, has been saving in three SIPs (systematic investment plans) worth 20,000 since 2006. He also deposits 60,000 in mutual funds once in six months, which is dedicated for the purchase of the house. "The main objective of these SIPs is to buy a house. I am not looking at other goals such as retirement. But I maintain a cash reserve for rainy days. My profession is very volatile in nature. So I have to keep a contingency fund," says Mr Joshi. He has an in-principle approved home loan of 70 lakh. Still he hasn't rushed into buying a property. He wants to cough up 15-20 lakh for the down payment.

Go For Joint Home Loans:

It's the best way to share the loan burden, especially in case of working couples. This trend is already picking up in metros such as Mumbai, Delhi or Bangalore due to spiralling of real estate prices. A joint housing loan comes with a number of advantages such as bigger loan amount, higher tax benefits and so on. To avail tax benefits, both the borrowers have to be co-owners. Co-borrowers, who are also coowners, are eligible for tax rebate in the proportion of their share in the loan. It means, you have to consider the repayment capacity of each spouse while deciding the share of the loan. So, a couple can be equal owners but if their share of the loan is in the ratio of 60:40, the tax benefits will be shared in that proportion.

"You have to get a break-up of share of the loan on a stamp paper at the beginning itself to avoid tax complications," says Vaibhav Sankla, executive director, Adroit. The maximum tax deduction available for a single borrower is 1.5 lakh. This deduction will apply to each borrower, taking the total possible deduction to 3 lakh. But a word of caution here. Before you decide on shouldering such huge loans together, it is better you do some selfevaluation. "Don't borrow up to the maximum limit as a percentage of your income. You should keep aside some contingency funds and investments which will come in handy in case of unforeseen emergencies such as job loss, forced sabbatical or even a family. Hence, single borrowers should not stretch their housing loan EMIs beyond 40% and double borrowers beyond 50% of their take-home salary," Suresh Sadagopan, a certified financial planner adds.

Source : http://epaper.timesofindia.com/