Home loans to become dearer following tightening of norms by RBI

The tightening of norms for home loans by the Reserve Bank of India (RBI) today not only means that a borrower will get less of funding, but mortgages could also become dearer.

Worried about the explosive growth in the real estate market in India, RBI Governor D. Subbarao decided to impose some curbs. ''In order to prevent excessive leveraging, it is proposed that the loan to value (LTV) ratio in respect of housing loans hereafter should not exceed 80 per cent,'' Subbarao announced while unveiling the RBI's second quarter review of monetary policy for the current fiscal.

Expressing concerns about the sharp rise in asset prices in recent months, he went in for a series of curbs to cool down the markets. Borrowers will now have to pitch in with at least 20 per cent of the cost of a property, as lenders will not be able to offer more than 80 per cent finance.

Similarly, the risk weight for loans above Rs.75 lakh has been raised sharply to 125 per cent. Banks have to provision 50 per cent of the value of a home loan of up to Rs. 30 lakh, but in the case of loans above Rs.75 lakh, the provision amount has been raised to 125 per cent. The provisioning is done to protect the system in case of defaults. The higher provisioning means that loans above Rs.75 lakh will become dearer over the coming months.

Cracking the whip on banks that have been aggressively promoting home loans through 'teaser rates,' the RBI raised the standard asset provisioning for all such loans. Teaser rates loans attract low interest rates in the initial years, but they increase during the subsequent years.

''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,'' said Subbarao, defending the decision to impose curbs.