Home loans: a RERA chance to bargain for low rates

The year 2017 has been a tumultuous one for the real estate sector. Demonetisation, introduction of GST, the Real Estate Regulation Act (RERA), 2016 and the thrust given by the Centre to promote affordable housing by putting it under priority sector lending have created a virtual shake-up in the sector, in general, and the housing finance industry, in particular.  

With the introduction of RERA - which has stringent procedures and compliances like no pre-launch sale of apartments or receipt of advance money without the required sanctions and statutory approvals of projects to be undertaken; 70% of money received from the buyers to be routed through a special ESCROW account (to prevent diversion of funds); applicability of 18% GST for under-construction projects (however works out to 12% as a third of land cost is excluded) - new project launches have ground to a halt across India, even as the inventory of unsold flats has risen to almost eight lakh units. This is the supply-side story.

The misery on the demand-side is no different. The sentiments of buyers of apartments have been seriously affected. Buyers are in a 'wait and watch' mode, waiting for the dust of the "radical reforms" to settle down. It is ironic that the subdued lending by the banks and lack of buyers' mojo comes at a time when the home loan interest rates are below 9%.

Home loan borrowers are in a dilemma. Variable or floating rate home loans, loan against property (LAP), are linked to the marginal cost of lending rate (MCLR), but fixed rate loans are not. The dilemma is whether to borrow or not, and whether to go by the fixed rate or variable rates as the loan tenure varies from five to 30 years. Some institutions are even offering loan tenures upto the age of 75 years of the borrower.  

New home loan borrowers under the MCLR will straightaway benefit by getting the lowest interest rate loan, now less than 8.5% for housing loans. Under the Pradhan Mantri Awas Yojana/Credit-Linked Subsidy Scheme, if a woman is a co-owner of the asset, the rate can be as low as 8.2%. The MCLR variable rate is normally linked to the variable one-year fixed deposit rate of the banks.

The dilemma is for the existing borrowers who have already availed housing loans and are at different periods in the loan tenure cycle. For borrowers who have completed, say, five years repayment out of a 20-year tenure, the operating rates would be in the band width of 10.5%-14%. Even when the banks pass on 20-50 basis points reduction in this segment, their interest rates will be still higher and above 10%, while the prevailing market rate is around 8.5%. This category is the most disgruntled lot.

Still, for those borrowers whose loan repayment track record is good - no instances of cheque returns on their equated monthly instalments (EMI); and a CIBIL credit rating score of above 800 - there are a few good options which can be judiciously exercised.

Option 1: Existing borrowers can aggressively negotiate with their present bankers and housing finance corporations (HFC) for a substantial reduction in the rate. The 'rate reset' option, which is offered at a nominal fee, is still desirable as it will save the hassles of "marrying" a new bank all over again, with all its procedures starting from scratch. This option is advantageous to borrowers who have completed a little more than half their loan tenure, where most of the interest component would have already been paid up. Most banks/HFCs are pushing this option to prevent good borrowers from moving out of their fold, especially during the last quarter of the financial year. Borrowers should fully capitalise on this score.

Option 2: For existing borrowers with loan tenures between 15 and 30 years and who have just completed repayments for 1-4 years, the best option is to 'switch over' the loans to banks/HFCs which are offering the least interest rates, currently in the range of 8.3-9%.

The Reserve Bank of India (RBI) and the National Housing Bank (NHB) have explicitly instructed banks/HFCs not to levy pre-closure charges to borrowers who switch over to another bank. Being in the last quarter of the financial year, banks/HFCs are very aggressive in poaching loans and are offering loan take-overs with additional 'top up', "zero processing fee", etc. Even the existing property insurance assigned to a bank can get transferred to the new institution or pro-rata premium refunded.

Option 3: Conservative borrowers who are comfortable in allocating a fixed amount of their salary towards the housing loan repayments can opt for fixed rate housing loan products which will be normally 2% higher than the lowest variable rates offered in the market. Presently, it can be in the range of 10-12%. "Flexi loans" can also be opted for by the salaried class, whose salaries rise over time. These products are so designed, with part fixed and part variable interest rate (combo offer) with rate resets at definite intervals.

It is ironic and strange that MCLR rates are applicable only to commercial banks and not to the HFCs, which are directly under the ambit of NHB (a subsidiary of RBI). Existing borrowers (with good repayment track record) with HFCs will migrate to banks which are offering lower than 9% on housing loans.

Buyers of apartments should exercise great caution and cross-check the list of projects approved on the RERA website for projects under construction and issuance of Occupation Certificate (OC), which do not require RERA approval.  

It would be wise for the customer to decide on the best option before the rate party comes to an end, probably by March.

(The writer is a Bengaluru-based banker)

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