Considerably improved climate for home loan customers
With development on all fronts as its singular mantra, the government has embarked on initiatives to vitalize several sectors, including housing. With respect to the housing sector, the RBI has responded by introducing a series of beneficiary-friendly measures and has drawn up guidelines that make home loans an attractive proposition. These include downward revision of home loan interest rates, revised loan to value (LTV) ratios, incentivizing lending norms, and more such positive moves. All things considered, the moves of both the government and RBI have considerably improved the climate to avail home loans. Reliable sources report a healthy customer response to the prevailing climate, as evidenced by an increase in home loan offtake. If you are keen on availing a home loan, going through the info below might be useful.
The information below - culled from RBI's website - seeks to familiarize home buyers with some of the operative guidelines related to availing home loans. Those who seek detailed information can visit this page on RBI's website.
Direct Housing Finance
Direct Housing Finance refers to the finance provided to individuals or groups of individuals including co-operative societies
Banks are free to evolve their own guidelines with the approval of their Boards on aspects such as security, margin, age of dwelling units, repayment schedule, etc.
The following types of bank finance may be included under Direct Housing Finance:
- Bank finance extended to a person who already owns a house in town/village where he resides, for buying/constructing a second house in the same or other town/village for the purpose of self occupation.
- Bank finance extended for purchase of a house by a borrower who proposes to let it out on rental basis on account of his posting outside the headquarters or because he has been provided accommodation by his employer.
- Bank finance extended to a person who proposes to buy an old house where he is presently residing as a tenant.
- Bank finance granted only for purchase of a plot, provided a declaration is obtained from the borrower that he intends to construct a house on the said plot, with the help of bank finance or otherwise, within such period as may be laid down by the banks themselves.
Construction Activities Eligible for Bank Credit as Housing Finance
The following types of bank credit will be eligible for being treated as housing finance:
- Loans to individuals for purchase/construction of dwelling unit per family and loans given for repairs to the damaged dwelling units of families.
- Finance provided for construction of residential houses to be constructed by public housing agencies like HUDCO, Housing Boards, local bodies, individuals, co-operative societies, and employers, priority being accorded for financing construction of houses meant for economically weaker sections, low income group and middle income group.
- Finance for construction of educational, health, social, cultural or other institutions/centers, which are part of a housing project and which are necessary for the development of settlements or townships;
- IV.Finance for shopping complexes, markets and such other centers catering to the day to day needs of the residents of the housing colonies and forming part of a housing project;
Loan to Value (LTV) Ratio
As per earlier instructions, the LTV ratio in respect of housing loans should not exceed 80 per cent. However, for small value housing loans i.e., housing loans up to 20 lakh (which get categorized as priority sector advances), the LTV ratio should not exceed 90 per cent.
With effect from June 21, 2013 these norms have been revised, and the following LTV ratios have to be maintained by banks in respect of individual housing loans:
The LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction; in case the LTV ratio is currently above the ceiling prescribed for any reasons, efforts should be made to bring it within limits.
It has been brought to our notice that banks adopt different practices for deciding the value of the house property while sanctioning housing loans. Some banks include stamp duty, registration and other documentation charges in the cost of the house property. This overstates the realizable value of the property as stamp duty, registration, and other documentation charges are not realizable and consequently the margin stipulated gets diluted. Accordingly, banks should not include these charges in the cost of the housing property they finance so that the effectiveness of LTV norms is not diluted.
Innovative Housing Loan Products - Upfront Disbursal of Housing Loans
It has been observed that some banks have introduced certain innovative Housing Loan Schemes in association with developers/builders, e.g. upfront disbursal of sanctioned individual housing loans to the builders without linking the disbursals to various stages of construction of housing project, interest/EMI on the housing loan availed by the individual borrower being serviced by the builders during the construction period/specified period, etc. This might include signing of tripartite agreements between the bank, the builder, and the buyer of the housing unit. These loan products are popularly known by various names like 80:20, 75:25 schemes etc.
Such housing loan products are likely to expose the banks as well as their home loan borrowers to additional risks, for example, in case of disputes such as between individual borrowers and developers/builders, default/delayed payment of interest/EMI by the developer/builder on behalf of the borrower during the agreed period, non-completion of the project on time, etc. Further, any delayed payments by developers/builders on behalf of individual borrowers to banks may lead to lower credit rating/scoring of such borrowers by credit information companies (CICs) as information about servicing of loans gets passed on to the CICs on a regular basis. In cases where bank loans are also disbursed upfront to builders/developers in a lump-sum on behalf of their individual borrowers, without any linkage to stages of construction, banks run disproportionately higher exposures with concomitant risks of diversion of funds.
In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/houses and upfront disbursal should not be made in cases of incomplete/under-construction/green field housing projects.
It is emphasized that banks while introducing any kind of product should take into account the customer suitability and appropriateness issues and also ensure that the borrowers/customers are made fully aware of the risks and liabilities under such products.
Housing Loan for purchase of constructed property/built up property
- In cases where the applicant approaches the bank/FIs for a credit facility to purchase a built up house/flat, it should be mandatory for him to declare by way of an affidavit-cum-undertaking that the built up property has been constructed as per the sanctioned plan and/or building bye-laws, and as far as possible has a completion certificate as well.
- An architect appointed by the bank must also certify, before disbursement of the loan, that the built up property is strictly as per sanctioned plan and/or building bye-laws.