Home Loans: Will RBI’s Relaxed Loan-To-Value Ratio Rules Make Home Loans Cheaper?


By DK Agarwal

The RBI has rationalized risk weights and linked them to loan-to-value ratios (LTVs) for all new home loans sanctioned through March 31, 2022. This should make the product attractive to borrowers and lenders.

According to RBI, retail home loans will attract a 35 percent risk weight when the LTV is less than or equal to 80 percent and a 50 percent risk weight when the LTV is greater than 80 percent but less. or equal to 90 percent.



The pegging of the mortgage risk weighting to the LTV for all new mortgage loans is a step in the right direction and will benefit the real estate sector. This measure is expected to give the industry a boost, as it is expected to lead to increased credit flows.

The loan-to-value ratio (LTV) refers to the proportion of the property’s value that a lender can borrow for a purchase. Previously, in June 2017, the RBI introduced a more scaled risk-weighting system for individual home loans, based on the size of the loans. Until now, the risk weighting of mortgage loans has been determined on the basis of the amount of the loan and the LTV ratio.

The new measure is expected to provide relief to large borrowers, say above Rs 75 lakh, whose current share is around 12-15% of the total home loan portfolio, where the risk weight is higher. According to regulatory standards, banks must provide for a minimum capital against a loan, calculated on the basis of the risk weight of the loan category. By adjusting the risk weight, the central bank allows banks to allocate less capital to these loans, making the category more attractive to them.

With the revision of the risk weighting, the capital reserve requirement for banks has decreased. Now they can offer differential interest based on LTV as their capital requirement will be lower due to the low risk weight on low LTV.

The real estate sector is experiencing a prolonged downturn. The Covid-19 came as another blow to the sector, causing a temporary halt to project launches. Even banks are reluctant to lend and buyers have become financially stressed. However, there are some signs of recovery in the real estate sector and this should help increase the flow of credit.

To boot, home sales recovered to 29,520 units in the September quarter from 12,730 units in the June quarter. The Bangalore market has seen a significant improvement in activity and has almost reached pre-Covid sales level. The Kerala market performed even better than last year. Even the markets in Pune and Delhi show some improvement. Many real estate companies are now focused on managing cash flow and debt at the operational level and trying not to let their debt increase.

Green shoots are being observed in the real estate sector, and they now give hope that all sectors will progress at the same pace towards the recovery. In the September quarter results, large IT companies such as

and announced a gradual increase in the number of employees. It also signals good growth in demand for housing.

And RBI’s latest move will encourage banks to offer home loan products with attractive features. Home loans will become more easily accessible and competitive for customers. Interest rates are already at lower levels. As demand slowly returns, the bigger and more established developers are poised to win the most. Thus, investors can think of allocating a small portion of their investments to real estate in a phased manner.

(DK Aggarwal is President and CEO of SMC Investments and Advisors.)

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