The pandemic brought the world to a standstill, affecting economies across the globe. In India, one of the worst-hit sectors was the realty sector. The new RBI rules for home loans were introduced to help the realty sector deal with this downturn. The new rules are expected to boost the housing sector and encourage more and more people to buy property. This write-up explores the new RBI guidelines for home loans and how they could prove beneficial for banks, real estate entities and home loan borrowers. It also discusses the RBI guidelines for floating rate of interest as well. Read on to know more.
What are the various home loan regulations laid by the Reserve Bank of India (RBI) for the financial year 2022-23?
Banks are an integral part of the country’s financial system and play a crucial role in issuing credit to the housing sector. The RBI guidelines for home loans that are to be followed by banks while formulating policies pertaining to real estate are as follows:
For land acquisition under RBI Guidelines for Home Loans
A bank can provide a loan for purchasing land if the borrower gives a written declaration that he intends to build a house on the land in question, within a stipulated period of time, with the help of the financial aid offered by the bank. However, banks should obtain a copy of the sanctioned plan of construction, duly issued by a competent authority, before granting any loan. They should obtain an “affidavit-cum-undertaking” to make sure that the borrower strictly follows the sanctioned plan. RBI guidelines for home loan disbursement require a bank-appointed architect to certify whether the proposed construction is in strict adherence with the sanctioned plan.
For building construction or ready-built houses under RBI Guidelines for Home Loans
Individuals can obtain bank loans to buy or build residential units on a “per family” basis. Individuals could also get loans for repair work carried out on their residential property.
Banks can grant financial help to individuals who already own a residential property in their name to buy or build a second property in the same or different city/village, if they are going to self-occupy it.
An individual who has received office accommodation or an out-station posting can avail of a bank loan for purchasing a property they wish to rent out.
Banks may grant loans to individuals proposing to purchase an old property in which they are residing as a tenant.
Banks may offer loans directly (on the guarantee of the government) or indirectly (via state governments) to slum-dwellers for constructions meant to ameliorate their living conditions.
Banks may extend additional financial assistance “within the overall limit” to undertake “alterations/ additions/ repairs” for a property that has already been financed by the bank. In case the property was originally financed through other sources, the bank can grant supplementary finance only after obtaining a paripassu.
Banks also have specific norms according to the RBI guidelines for home loan transfer.
For affordable housing loans under RBI Guidelines for Home Loans
Banks can finance affordable housing by issuing long-term bonds with a maturity period of at least seven years. This is, however, subject to the conditions referred to in the “Issue of Long-term Bonds by Banks” circular DBR.BP.BC.No.25/08.12.014/2014-15 dated July 15, 2014, on Financing of Infrastructure and Affordable Housing
Risk weights with LTV rate relationship under RBI guidelines for home loans 2022
Banks should adhere to the following Loan to Value (LTV) ratios and Risk Weights (RWs) while determining the “quantum of loan” according to the new RBI guidelines for housing loans.
Category of loan
LTV ratio in percentage
RW ratio in percentage
(a) Individual Home Loans
Up to 30 lakhs
> 80 and < 90
50
Above 30 lakh & up to 75 lakhs
< 80
35
Above 75 lakhs
< 75
35
LTV is the ratio of the value of a property to the loan amount the bank is ready to grant. RW is the minimum capital amount that a bank should set aside in order to cope with any unanticipated loss arising out of risks associated with any property.
RBI has decided to rationalise the RWs regardless of the loan amount. This was clarified in the circular DOR.No.BP.BC.24/08.12.015/2020-21 dated October 16, 2020, on Rationalisation of Risk Weights for “Individual Housing Loans”.
LTV ratio in percentage
RW in percentage
≤ 80
35
> 80 and ≤ 90
50
Banks are not allowed to incorporate stamp duty, registration and other documentation charges in the price of the property if the cost of the same is more than Rs. 10 lakhs.
Upfront disbursal of housing loans under RBI guidelines for home loans 2022
No upfront disbursal of loan should be made to incomplete/under-construction projects. Disbursal amounts will depend on the stage of construction of the property.
Projects sponsored by the government or statutory authorities, however, shall enjoy disbursal of loan as deemed fit by any such authorities.
RBI rules for home loan interest rates under RBI guidelines for home loans 2022
Interest rates charged by banks on housing loans are in accordance with the guidelines mentioned in the Master Direction - Reserve Bank of India (Interest Rate on Advances) Directions, 2016 - as modified from time to time. Banks can grant all categories of advances on either fixed or floating interest rates. The new RBI guidelines for floating rate of interest state the basic norms for loans based on a floating rate of interest.
Mandatory approval from the relevant regulatory or statutory bodies
It is mandatory for borrowers to obtain approval for the project from a statutory body to ensure seamless disbursement of loans.
Housing loan limit
Urban Co-operative Banks’ Tier I and II limits have been increased. The new Tier I limit has been increased to Rs. 60 lakhs from Rs. 30 lakhs, and for Tier II, it has been increased to Rs. 1.4 crores from the earlier limit of Rs. 70 lakhs.
For Rural Cooperative Banks with a minimum net worth of Rs. 100 crores, the limit has been increased to Rs. 50 lakhs from the earlier limit of Rs. 20 lakhs.
For all other RCBs, the limit stands revised to Rs. 75 lakhs from the earlier limit of Rs. 30 lakhs for other Banks in the Rural Cooperative sector.
Repo rates unchanged
The repo rate is the rate at which commercial banks borrow money from RBI in case there’s any fund deficiency. Since RBI has kept the repo rate unchanged at 4% for the financial year 2022-23, home loan borrowers paying monthly instalments at a flexible interest rate will still be paying the same rate as before.
How will the rationalisation of risk weights impact individual home loan borrowers?
To incentivise more people to buy properties and in an effort to reduce outstanding home loans, RBI has rationalised the RWs and linked them to LTV ratios for home loans that have been granted post-October 16, 2020. This will apply till March 31, 2023, according to the latest RBI guidelines for home loans. This will encourage more people to purchase their own houses.
Banks usually take LTVs into consideration while determining the risk factor associated with a particular home loan. This is what helps them decide whether or not to approve a loan. Linking the Loan to Value ratio with RWs has led to higher credit flow for individual home loans. Hence, home loans have definitely become cheaper for individual home loan borrowers.
RBI guidelines for home loan prepayment charges, home loan processing fees and home loan balance transfer have been updated as well.
Conclusion
Most borrowers repay home loans within a span of 20 years at the most. Moreover, the revised RBI rules and regulations for home loans have made properties affordable to more and more salaried individuals. If you are looking for a home loan to purchase property, get from home loans from Tata Capital with an attractive rate of interest starting at 7.75%.
25 July 2022
7 mins read
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