In its recent credit policy, the RBI has asked banks to set aside higher provisions on their teaser loans as a measure to discourage very strong expansion in such loans. If you are contemplating taking a home loan, how will this impact you? Going by the hype created for the past few days, it may appear to be a big hurdle, but a back-of-the-envelope calculation shows that the impact is not too alarming. Here's why:
The average size of home loans taken in India is at about Rs 17-18 lakh going by the data from two major players in the home loan turf — SBI and HDFC.
Now, HDFC offers a special home loan rate of 8.5 per cent fixed for the first year and 9.25 per cent for the second year. From the third year onwards, the interest rate will be pegged to HDFC's benchmark Retail Prime Lending Rate (RPLR). For its customers, HDFC calculates floating interest rate at a spread of five percentage points below its RPLR.
Tweaking rates
The current RPLR is 14.25 per cent and assuming (hypothetically) that it remains at this level, this effectively means that for borrowers who complete two years and who move out of the special offer , the interest payable would be at 9.25 per cent for today's borrowers. During the policy review, the RBI stated that the likelihood of further interest rate hike in the immediate future was relatively low. Housing finance companies currently offer a one-time swap for the existing borrowers with a fee of 0.5 per cent of the outstanding loan and for such borrowers they charge an interest rate of 9.25 per cent.
What would be the impact of higher interest rates on borrowers today? For an individual who has availed of a 15-year ‘teaser' loan of Rs 20 lakh at 8.5 per cent for the first year, the EMI works out to Rs 19,700 for the first year and Rs 20,583 for the second year. For an increase of 0.75 per cent in the interest rate, the effective outgo for a month would rise by Rs 883.
Impact on EMI
Usually, while sanctioning loans, lenders look at the instalment-to-income ratio. They make sure that borrowers are left with a take home salary of at least 40 per cent of gross pay after meeting the liabilities. Even for special offers, lenders would consider eligibility only after taking individual repayment capacity of the first few years.
Going by a ball-park calculation, this would mean that to avail a loan of Rs 20 lakh an individual should earn a monthly gross salary of Rs 50,000.
Due to higher provisioning on teaser loans, if the home loan lenders withdraw the special offers and charge a floating interest of 9.25 per cent, the incremental EMI would be Rs 900 per month. It may not be a deterrent to those earning Rs 50,000 or more per month.
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