The rise in interest rates has continued unabated since May 2022, when the Reserve Bank of India (RBI) started hiking repo rates. After a cumulative hike of 250 basis points (bps), existing home loan borrowers are staring at a steep interest burden and inflated equated monthly instalments (EMIs).
Despite the hardening rate scenario, India’s only private mortgage guarantee company has seen a pick-up in home loan demand in the Rs 30-50-lakh and the Rs 50-75-lakh segments.
Regulated by the Reserve Bank of India (RBI) under the Mortgage Guarantee guidelines issued in 2008, IMGC’s partners include banks and housing finance companies (HFCs), such as State Bank of India (SBI), Bank of Baroda, HDFC, LIC Housing, and ICICI Bank.
On the flip side, millennials are increasingly postponing home purchase decisions due to lower loan eligibility and emergence of attractive leasing options. IMGC provides credit default insurance which banks or NBFCs have taken, specifically for home loans. So, if a customer were to default on a home loan, IMGC indemnifies the bank and helps mitigate the lender’s losses.
In a conversation with Moneycontrol, Amit Diwan, Chief Distribution Officer at IMGC discusses the impact of six repo rate hikes in this financial year on borrowers, demand for home loans in this rising interest rates scenario, millennials’ preference on whether to rent or buy, and more.
Edited excerpts:
RBI increased the repo rate by 25 bps to 6.50 percent in February 2023, taking the cumulative hike since May 2022 to 250 bps. What’s been the impact of six consecutive repo rate hikes on borrowers’ home loan burden?
The rate hikes have been passed on to borrowers, which have led to a significant increase in EMIs of customers ranging from 10-25 percent.
For borrowers, managing rising EMIs is getting difficult, as interest rates are now touching 9 to 9.25 percent per annum.
Also read | Increase home loan EMIs or tenure: What should borrowers do?
What would be your advice to borrowers – existing and new – in the current scenario?
The borrowers have a couple of options in such a scenario. The first is to negotiate with your existing lender for the best possible rate, based on your credit profile and repayment history.
If your bank is not willing to look at it, look at the competition as to what is the best possible pricing you can get from other banks or NBFCs. Second, we advise borrowers to start making some partial prepayments from annual bonus and savings. You can consider withdrawing from low-interest paying fixed deposits to pre-payment of a home loan. These are a couple of possible scenarios that a customer can look at.
New borrowers shouldn’t postpone their purchase decisions, but maintain a margin of safety in terms of repayment capability, given the possibility of further rate hikes in the coming quarters due to inflationary pressures.
Also read | Should you prepay your home loan now, after six policy rate hikes?
Have you witnessed any dampening of sentiment due to rising interest rates?
Despite the rate hikes, the demand for home loans has picked up in the Rs 30-50-lakh and the Rs 50-75-lakh segments. There’s a clear buoyancy and that’s the area where a lot of lenders, including non-banking financial companies (NBFCs) and banks, are also focusing on.
Also read | Looking for a new home loan? You may have to settle for a lower amount now
What is the approach of millennials towards purchasing a home in the current rising interest rate scenario?
We have observed that in the last five years the average age of borrowers has remained static at about 38 to 39 years. This means millennials are increasingly postponing the ownership of houses, largely because of two reasons. One is the fact that we have very conservative terms of 75 percent loan-to-value (LTV), which is probably the bracket you will fall in any major metro in the country. To accumulate that 25 percent of the savings, people take a lot of time. So, that's one challenge. Secondly, we are seeing renting emerge as an alternative to purchasing a property.
What role does IMGC play in the mortgage ecosystem?
We provide credit default insurance which banks or NBFCs have taken, specifically for home loans. So, if a customer were to default on a home loan, we indemnify the bank and it helps them mitigate their losses. From a customer’s standpoint, it helps the customer get a loan on more favourable terms. For instance, borrowers will be able to get 15 to 20 percent higher loan amount, as a result of which their overall cost of borrowing reduces and their affordability increases. The cost the borrower has to incur is Rs 17 per lakh to the EMI.
With rising lay-offs in the start-up and information technology (IT) sectors, do you expect an increase in home loan non-performing assets (NPAs)? What can borrowers do at their end in such a situation?
There is a slight spike in NPAs in the last quarter due to a steep increase in the EMIs of some borrowers. Mass layoffs will lead to higher NPAs, although with a lag. If a borrower is faced with such a situation, the borrower can discuss the tenor extension possibilities with the lender to minimise outflows. Complete moratoriums aren't available currently. Borrowers can also look at utilising their savings to pay EMIs. Defaulting on paying EMIs is not advised, as it will adversely impact the ability to get loans at favourable terms in the future.
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