Lenders may try to reduce their credit risk by offering lower loan amounts, given the ongoing correction in property prices
Falling real estate prices may offer some hope to those wanting to buy a house, but things may not be that easy.
Banks may turn cautious while disbursing home loans. Experts in the banking industry confirmed to Moneycontrol that loan disbursements can get stringent. This tightening can impact home and top-up loans. Two reasons are cited for this phenomenon. First, the repayment capacity of the average borrower has deteriorated. Second, in many cases, the prices of the properties that are acquired using loans (and also the collateral for the loan) are also decreasing.
Typically, in a crisis, banks tend to go slow on their lending activities. According to a TransUnion CIBIL Credit Outlook (TUCIBIL) report (June 2020), the approval rates for home loans declined by 16 per cent between the second quarter of 2008 and the first quarter of 2009 due to the global financial crisis back then. A repeat is possible in the post-COVID world.
Approvals apart, the demand for home loans is expected to be low in 2020.
Spreads on repo-linked loans may increase
TUCIBIL points out that lower interest rates and reduced margins are limitations from banks' point of view. “While our home loans are linked to repo rate, our cost of funds is not. Therefore, at some point in time, banks will increase their spread over the external benchmark. This will be applicable to fresh loans, as the spread in loan contracts already executed will be locked in for three years,” says a banker who wish not be identified.
With effect from May 1, State Bank of India widened the spread over its external benchmark – the repo rate to which its home loans sanctioned after October 1, 2019 are linked – by 20 basis points. This move comes at a time when lending rates in the market, including the bank’s marginal cost of funds-based lending rate (MCLR), have been heading south.
Other banks too have sensed the increased risk in lending and may resort to raising spreads or the risk premiums over the benchmark. Such a move will not hurt existing borrowers now, as the repo rate-linked home loan products are just one year old and repricing is possible only at the end of three years from the date of contract. “While the increased spread or credit risk premium will not push up lending rates, it will definitely reduce the transmission of reduced repo rates to new borrowers,” says Naveen Kukreja, CEO and co-founder of Paisabazaar.com.
Borrowing will be difficult
Increasing spreads apart, getting a loan can also become a tough task. “The added risk of a shrinking economy and depreciating property prices will make lenders more cautious,” says Sukanya Kumar, founder and CEO of RetailLending.com.
If you work in a sector that has been hit by the pandemic, such as aviation, tourism, hospitality, then banks may either turn you away or insist on getting a co-borrower.
Banks may also offer lower loan amounts. “Given the perception of increased credit risk for new retail loans, lenders may try to reduce their credit risk by reducing the loan to value ratio (LTV) or EMI to income ratios depending on the borrower’s credit profile,” says Naveen.
For example, for a property valued at Rs 50 lakh, the lender can offer up to Rs 40 lakh towards home loan (80 per cent LTV). However, in the post-COVID scenario, bankers may want to curtail the LTV. So, you will have to cough up higher sums from your pocket.
Most banks are comfortable with EMIs not exceeding 30 per cent of the take home income of the borrower. In some cases, this ratio can go up to 50 per cent. Bankers may want to bring the ratio to the lower end in the future.
Your credit scores too will play a bigger role now. “In light of the current situation, we cannot rely on current credit scores alone. We will need to ascertain how the credit score of a borrower has changed in the last one year,” says the banker quoted earlier.
Repay your loan and credit card dues on time to have a good score.
Under-construction houses less welcome
Though TUCIBIL is upbeat on relatively less cases of non-repayment of home loans, it says that there is a possibility of non-payment for under-construction home loans. The price correction can make many home buyers jittery and banks may want to avoid such a situation. The delay in completion is another risk. If you are keen to buy an under-construction property, do check if the banks of your choice are willing to offer loans. Banks are more likely to lend to a ready-to-move-in property and selectively work with developers offering under-construction inventory.
What should you do?
While buying your dream house, do not rely on what banks told you before COVID struck. Check with the bank if the loan approval letter is still valid before entering into any property purchase deal. Pull out your credit report, and fix errors, if any. If you have taken a moratorium on your existing loans, be prepared for an extra-cautious stand from your banker while assessing your loan application. Repay your loans and credit card dues on time.(Preeti Kulkarni also contributed to the story)