In the fiscal year 2021, housing loans in India added up to roughly Rs. 14.54 trillion! The Reserve Bank of India (RBI) continuously updates its guidelines to encourage financial stability and safeguard consumers. It is vital for potential home buyers to stay informed about the latest regulations.
The Reserve Bank of India, being the highest banking and financial authority in India, collaborates with the Government of India to regularly update and enhance its policies in order to release annual RBI guidelines for home loans. These guidelines outline the specific rules that lenders and borrowers must adhere to when applying for a home loan. It is important to note that home loan rules and regulations are subject to frequent changes.
As a result of the continuous increase in home loan interest rates and loan tenure starting from May 2022, the Reserve Bank of India has introduced new guidelines for home loans. On August 18, 2023, the RBI released its latest notice, taking into account the current state of the country’s financial sector. The central bank states that these new rules for home loans aim to standardize and bring uniformity. All lenders have been directed by the regulator to implement these changes for both existing and new home loan accounts by December 31, 2023. Numerous consumers have lodged complaints with the central bank regarding misunderstandings regarding elongated loan tenures or increased monthly installments imposed by the banks. The recent notification intends to promote transparency and open communication between lenders and borrowers.
RBI has recently released updated guidelines for home loans, aiming to provide more clarity and facilitate a smooth borrowing experience for potential home buyers. These guidelines cover various important aspects of home loans, from loan-to-value ratios to interest rates.
To become an informed borrower and to make smart decisions, here are the key points of these new RBI guidelines and how they will impact home loan borrowers:
Loan-to-Value Ratio (LTV Ratio)
The LTV ratio is used to calculate the maximum amount a borrower can obtain as a home loan, and it is based on the property’s value. In other words, The LTV ratio refers to the maximum loan amount that can be sanctioned in relation to the value of the property being purchased.
The RBI has set different LTV ratios depending on the property’s cost. To promote home ownership and make home loans more affordable, RBI has made changes to the Loan to Value Ratio (LTV). For home loans under Rs. 30 lakhs, the LTV ratio has been increased to 90%. And for loans above Rs. 75 lakhs, the LTV ratio is now up to 75%.
This means that individuals will find it easier to purchase a property by financing it through a home loan, as the higher the LTV value, the more accessible it becomes. Furthermore, RBI has also stated that registration charges, stamp duty, and documentation charges will not be included when calculating the LTV. This reduces the upfront payment of 10% that borrowers need to make for a home loan. Besides, if the cost of the house does not exceed Rs. 10 lakh, banks are permitted to add registration, stamp duty, and other documentation charges to the house’s cost when calculating the LTV ratio.
Maximum tenure for Home Loan
The RBI has implemented guidelines to specify the maximum tenure for home loans in order to protect potential home buyers from excessive debt burden. As per the new rules, the maximum tenure for home loans is set at 30 years. This enables borrowers to distribute their repayments over a longer period, making it more affordable and manageable. In other words, this extended tenure provides borrowers with the flexibility to choose a repayment schedule that suits their financial situation. This time period can only be extended in certain circumstances, after careful consideration by the lender. If borrowers fail to repay the loan within this timeframe, they may risk losing their property and may face additional penalties.
Equitable Mortgage
An equitable mortgage is a method of establishing a property charge as collateral for a loan. According to the recent guidelines from the RBI, it is crucial to create equitable mortgages for home loan transactions. This ensures that the lender has a lawful right to the property and can reclaim the remaining loan amount in the event of borrower default. Potential home buyers should take note of these guidelines for a professional and secure loan process.
Shift between fixed and floating interest rates
The central bank has made it mandatory for lenders to give borrowers the option to switch from floating interest rates to fixed interest rates on home loans when the interest is reset. Additionally, the RBI has instructed lenders to be transparent in disclosing the fees associated with such a transition. These fees will be clearly communicated in the loan sanction letter and when the rates are revised.
Home Loan balance transfer charges
The RBI has recently tackled the matter of home loan balance transfers in its guidelines. This means that potential home buyers now have the flexibility to move their home loans from one lender to another without being saddled with exorbitant fees. This promotes healthy competition among lenders and gives borrowers the chance to enjoy more favorable terms and conditions.
Prepayment charges
The RBI has made an important decision to protect borrowers by eliminating prepayment charges for floating-rate home loans. This means that borrowers can now repay their loans before the agreed-upon time without incurring any additional fees. As per the latest guidelines from the RBI for home loans in 2023, banks are required to allow borrowers to increase their monthly installment payments or extend their loan tenure. This gives borrowers the flexibility to partially or fully repay the loan at any point in time. The new rules also ensure that extending the loan tenure does not result in negative amortization. In other words, the interest payments are included solely in the monthly installments and are not added to the outstanding principal amount or carried forward to the following month.
Home loans can amount to Rs. 1 crore or more in some cases, and the maximum tenure can be up to 30 years. By making partial or full prepayments before the loan tenure ends, borrowers can save money on their home loans. This is especially beneficial if additional funds become available due to factors such as business profits or salary increases.
To assist home loan buyers in prepaying their loans, the RBI has removed prepayment charges for floating interest rate loans, while a penalty of up to 3% is applicable for fixed interest rate loans. Previously, lenders were charging prepayment penalties of up to 5% of the loan amount. This change aims to make it easier for potential home buyers to manage their loan repayments.
Repo Rate
The Repo Rate, set by the Reserve Bank of India (RBI), is the interest rate at which commercial banks can borrow money from the central bank. This rate plays a crucial role in controlling inflation and affecting home loan interest rates. When the repo rate decreases, it reduces the cost of borrowing for banks, resulting in lower home loan interest rates for potential home buyers. The repo rate indicates the cost of borrowing money from the RBI, and it is adjusted by the central bank in response to inflationary pressures in the economy. Higher repo rates prompt banks to charge higher interest rates on home loans, while lower repo rates translate to lower loan interest rates for home buyers.
On 10th August 2023, the RBI maintained the repo rate at 6.5%, which led to a 25-basis point increase in home loan interest rates. Experts suggest that the decision to keep the repo rate unchanged is driven by concerns about rising inflation and the need to maintain stable borrowing costs. This status quo benefits potential home buyers as it further decreases their EMIs. Additionally, the unchanged repo rates provide stability to home loan rates. Analysts predict that the RBI will likely maintain this status quo in the near future.
Balance Transfer Facility
RBI has lately announced the removal of foreclosure charges for home loan borrowers who wish to refinance their home loans. This means that borrowers now have the option to transfer their current home loan to another bank in order to take advantage of a lower interest rate. When the borrower decides to close their home loan with the current bank, they are no longer required to pay any foreclosure charges. This change will provide potential home buyers with more flexibility and ease when it comes to managing their home loans.
