RBI revision of loan-to-value ratio seen easing home loan rates by 25-30 bps

The move by the Reserve Bank of India (RBI) to rationalise risk-weights and loan-to-value ratios of individual housing loans could bring down interest rates by 25-30 basis points over the next few months, says a report.

"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," Crisil Research said in a report.

RBI on Thursday announced the extension of a lower LTV ratio for home loans up Rs20 lakh to loans of up to Rs30 lakh in view of the higher cost of housing.

As per the revised policy, a lower LTV of 90 per cent would now be applicable to home loans of up to Rs30 lakh.

For properties above Rs30 lakh and up to Rs75 lakh, the LTV will be up to 80 per cent and those above Rs75 lakh, it will be 75 per cent.

Most banks have already lowered their base rates by 25-35 bps following a 50 bps reduction in RBI's repo rate to 6.75 per cent on 29 September.

RBI also lowered risk weights on housing loans of up to Rs75 lakh from 50 per cent to 35 per cent in cases where the borrower puts in at least 20 per cent of the value of the home as own equity for loans up to Rs30 lakh; and, 25 per cent of the value of the home as own equity for loans between Rs30 lakh and Rs75 lakh.

According to the Crisil report, lower risk weights should significantly boost the return on equity (RoE) of the mortgage portfolio of banks and this should allow an easing of lending rates.

"However, with competition in home loans continuously intensifying and the interest-rate cycle turning south, we believe this is unlikely, and banks will have to pass on the benefit to borrowers. Therefore, any boost to RoE would be marginal."

According to the report, around 80 per cent of home loan borrowers and 70 per cent of home loans (by value) would meet the criteria for lower risk weights set by the RBI and thereby benefit from the change in regulation.

Home loan borrowers in smaller cities are likely to be the biggest gainers from the RBI move due to limited supply at affordable price points in the larger cities, it said.