RBI's Step To Revive Real Estate

The Reserve Bank of India (RBI) increased the amount that banks can advance for a property purchase and also reduced the so-called risk weights attached to some categories of home loans in a move that will likely make more credit available to borrowers and improve sentiment in a struggling real estate market. The RBI’s decision comes in the wake of all major banks reducing interest rate on home loans.

In a notification, RBI allowed a loan-to-value ratio (LTV) of up to 90% for home loans of Rs.30 lakh or less. Earlier, 90% LTV was allowed only for loans up to Rs.20 lakh.

a) For the first category loan, the new minimum housing loan slab is up to Rs 30 lakh, with (i) an LTV ratio of less than or equal to 80 per cent, to have a risk weight of 35 per cent and (ii) an LTV ratio of greater than 80 per cent and less than or equal to 90 per cent, to have a risk weight of 50 per cent.

b) The second housing loan category is above Rs 30 lakh and up to Rs 75 lakh, with (i) an LTV ratio of less than or equal to 75 per cent, to attract a risk weight of 35 per cent and (ii) an LTV ratio of greater than 75 per cent and less than or equal to 80 per cent, to attract a risk weight of 50 per cent.

c) The third housing loan category is above Rs 75 lakh, with an LTV ratio of less than or equal to 75 per cent, to have a risk weight of 75 per cent.

RBI’s move comes in the wake of a government plan, called Housing for All, to build 20 million houses for the urban poor by 2022, which coincides with 75 years of independence.

Understanding the loan to value

Simply stated the loan to value (LTV) is the ratio of the amount that you wish to borrow for a home to the actual value of the home. The LTV can be calculated from the actual worth of the home, the mortgage being taken and the down payment that has been made prior to the loan. For example, the value of a house is Rs. 40,00,000 and a down payment of Rs. 400,000 has been made a loan of the balance amount that is Rs. 36,00,000 is being sought. In this case the LTV comes to be Rs. 36,00,000 of the actual value of Rs. 40,00,000, which works out to 90%. Thus the LTV is 90%.

Why your LTV Ratio is important

Lenders will evaluate your loan-to-value ratio while they are underwriting your loan. In general, borrowers with lower LTV ratios will qualify for lower mortgage rates than borrowers with higher LTV ratios. Borrowers who have a lower LTV ratio are considered less risky to lenders because they have more equity in their homes. In the eyes of a lender, borrowers with a lower LTV, and thus more equity in their homes, are less likely to default on their mortgage, and even if they did default, the lender would have a better chance of selling the home in foreclosure for at least as much as they are owed for the mortgage.

Possible Effects of the Changes

a) RBI's move to lower loan-¬to-value ratios and risk weights for individual housing loans can help bring down interest rates on home loans by another 25¬-30 basis points over the next few months, says a report.

b)  "We expect interest rate on home loans to come down by another 25¬30 bps over the next few months, triggered by RBI's move to lower risk weights on select home loans (up to Rs 75 lakh) where borrowers are willing to put in more money and thus lower the loan¬to¬value (LTV) ratio," the report by rating agency Crisil said.