RBI Changes Home Loan Norms
In March 2015, the Reserve Bank of India (RBI) changed the norms for home loans of up to Rs.10 lakh. Now, banks are allowed to include stamp duty, registration charge and documentation expenses to calculate the total cost of a unit. Currently, these charges form around 15 percent of the cost of the house, and have been causing hardship to the economically weaker sections of society. RBI’s move is intended to ease this hardship, since the ratio of Loan to Value (LTV) is calculated based on the value of the house.
Relief for low-income home buyers
To understand how this truly helps a home buyer, let us take an example. Say the house costs Rs.10 lakh. Banks offer a loan up to 85 percent of the amount. Before the RBI’s ruling, the home buyer would get only Rs.8.5 lakhs sanctioned by the bank, and he would need to put in a down payment of Rs.1.5 lakh. All the other charges such as registration, stamp duty and documentation charges would have to be borne by him. The registration fee is between 5 and 8 percent of the home cost, based on the state. The service tax is 3.09 percent, which should go up to 3.5 percent soon. Including all the other charges, the home owner would have to pay an additional amount of up to Rs.1.6 lakhs, apart from the down payment he is already committed to.
After the RBI’s changed rule, the numbers will change. The total cost of the house will be calculated as Rs.11.6 lakhs, instead of Rs.10 lakhs. The bank will sanction 85 percent of this amount, which is Rs.9.86 lakhs, so the home owner will need to self-fund only Rs.1.74 lakhs, rather than the earlier Rs.3.1 lakhs.
From the home owner’s perspective, this change in norms is welcome. Home loan borrowers, who are from economically weaker sections (EWS) and low income groups (LIG) will benefit a lot because of this move by the government. Most individuals are unable to come up with a large sum like Rs.3 lakhs. In the current Indian scenario, this is where private or personal loans come in. Home owners typically borrow at huge interest rates that drain their pockets, to fund the amount that the bank was not including in its price calculations. Typically, personal loans charge interest rates that are much higher than home loan rates. After the change, the home owner needs to look at self-funding only half the earlier amount. This eases monthly EMIs and increases peace of mind.
From the home-loan disbursing bank’s perspective, these norms do not make much of a difference. The effort, cost and repayment does not change even when the extra amounts are added to the total price, or total sanctioned amount.
Practically, how effective is this easing of norms?
The capping of Rs.10 lakhs seems insufficient, especially as popular opinion is that it should have been at least Rs.15 lakhs. In most cities, there are very few home options that are below the range of Rs.10 lakh. In metros, even supposed low cost housing starts from Rs.15 lakhs. Tier II and III cities also have very few options below Rs.10 lakhs.
The socio-economic aspect also needs to be taken into account. Using the same example as earlier, the EMI works out to be a little less than Rs.10000, for a sanctioned amount of Rs.9.86 lakhs at 10.5 percent interest per annum. Assuming that an individual spends one third of his income on home loan repayment, we are talking about someone who earns around Rs.3.6 lakhs per annum. This individual is mostly not going to be happy investing in a home that costs only Rs.10 lakh, since there is sure to be an element of aspiration that changes the equation. Earning Rs.30000 per month is not considered economically weak, from the social point of view. Someone from this income bracket will be looking at trying to afford a home that is at least Rs.15 lakh or more. So RBI’s changed norm may not really benefit the economically weaker sections of society that it is targeting.
