Turmoil in home loan sector: options to borrowers

The year 2018 has been tumultuous for the banking sector, Non-banking financial companies (NBFCs), Housing Finance Companies (HFCs) that has terribly impacted the growth trajectory of the economy in general and virtually shaken the real estate/housing sector in particular.

Unfortunately, at a time when the disruption of demonetisation, teething problems of GST and the Real Estate Regulation Act (RERA) are getting settled down, the ‘big’ default in repayment of loans by Infrastructure Leasing and Financial Services (IL&FS) has jolted the NBFCs, HFCs and the banks - severely impacting their liquidity and has virtually brought ‘lending for housing’ to a grinding halt.

The liquidity deficit has touched Rs 1.3 lakh crore this week and is expected to cross Rs 3 lakh crore by March 2019. The minimum bailout amount (post settlements) required to salvage IL&FS is a staggering Rs 25,000 crore. RBI has also rejected special “liquidity window” for NBFCs. This will lead to hike in lending rates and aggravate the delinquency position.

NBFCs/HFCs have raised their lending rates to housing by 1-3% and banks have hiked their marginal cost of lending rate (MCLR) in spite of Monetary Policy Committee (MPC) of RBI maintaining status quo on the policy rates in the October review.

Fear has replaced cheer. All types of borrowers - existing and new are affected in different ways in varying degrees.

Housing loan borrowers from the banks prior to April 2016 come under the ‘base rate’ scheme - not linked to any benchmark rate.

Post April 2016, banks have moved to marginal cost of lending rate (MCLR). Under MCLR the lending rate to housing is based on 1-year fixed deposit rate with loading of tenure premium spread. The present MCLR of banks are in the band width of 8.15% - 9% and consequently housing loan rates will be in the range of 9% - 10%.

The interest rates on housing loans prior to April 2016, on the base rate system will be on a higher side and complete migration of loans to MCLR has not happened, as there is no ‘sunset’ clause for the transition.

More serious is, borrowers who have availed housing loans from HFCs/NBFCs which are not linked to MCLR but linked to their own “base rates”. Such rates are not uniform and methodology can be opaque.

The borrowers are in a state of confusion whether to opt for fixed rate or variable / floating rate housing loans.

The new borrowers under the MCLR will get housing loans from the banks less than 9.25% with special concession to women who are co-owners of the property. For loan against property (LAP), the rates will be between 10-12%.

NBFCs / HFCs housing loan rates are in the bandwidth of 10-13%. Most of them have almost stopped LAP, builder loans as delinquency is on the rise and accounts turning sticky in these segments.

Viable options:

The dilemma is for existing borrowers with the HFCs/NBFCs and borrowers who are on the base rate system with the banks, whose interest rates are on a higher side and at different periods in their loan tenure cycle.

Option 1:

Conservative borrowers and salaried class who are invariably comfortable allocating a fixed amount of their salary towards loan repayment can opt for ‘fixed rate’ which will be normally 1.5% - 2% higher than the least of the variable rates offered in the market.

Presently it can be in the rage of 12%-14%. Caution must be exercised by the borrowers that the fixed rate is ‘truly fixed’ for the entire tenure of the loan and documented in the loan agreement without any ambiguity. Otherwise, borrowers will experience ‘rate fixing!’.

Option 2:

For those who envisage increase in salaries over a time horizon can opt for ‘flexi loans’ - specially designed with part fixed and part variable - combo offer - with rate resets at fixed intervals - popularly known as GRIL - graduated repayment instalment loan.

The decreasing repayment instalment loans - DRIL permits payment of higher EMIs initially (balloon payment) and reduces the installment burden, as the loan tenure advances.

Option 3:

Borrowers on fixed rate can get loan conversion done to the present variable rate scheme, preferably with their own bankers, with a nominal fee or get the loan transferred to some other bank/HFC where rates are attractive with nominal fees.

Option 4:

Existing borrowers with HFCs / banks with good repayment track record without cheque returns of their EMIs and credit rating score of CIBIL (Credit Information Bureau (India) Limited) / Equifax above 750 should negotiate with their present bankers/HFCs for substantial reduction in the rate / to match with the present rates.

Such rate can be in the range of 10.5% - 11% as against the new rates offered to fresh borrowers of housing loans at less than 10% under the MCLR.

This option is advantageous to borrowers who have completed more than half their loan tenure where most of the interest component would have already been paid. There will be a nominal ‘reset fee’ which is worthwhile instead of undergoing the trauma of the entire loan process with a new bank.

Few HFCs/NBFCs have temporarily put on hold the conversion scheme to protect their ‘net interest margins’.

Option 5:

For existing borrowers who have completed repayment less than 5 years, the ideal solution is to switch over the loans to banks that are offering MCLR rate at 9.25% or less. There is further concession of additional 25 basis points for women borrowers who are joint owners of the property.

Added advantage is that banks/HFCs cannot levy any pre-closure charges for switch over of housing loans as per RBI/NHB regulations.

Even the existing property insurance assigned to a bank/HFC can be transferred to the new ‘take over’ institution or pro rata premium refunded.

Being festival season, most banks are offering fresh loans with ‘zero’ processing fee and builders, to liquidate their huge unsold inventory are offering, servicing of pre-EMI interest of borrowers till the handover of the apartment and aggressively pushing 5:85:10 scheme (down payment 5% of flat cost, 85% loan from banks and last 10% again from the customers at the time of possession).

It would be wise for the borrowers to quickly freeze on the best option before the RBI hikes the policy rates which is imminent by the year end.

(The writer is Bengaluru-based banker)