Analysis. Time for home loans with rising interest rates

The biggest challenge for home loan lenders is talking down the ambitious home acquisition plans of most borrowers. There is the tendency to overreach — to aspire for a two-bedroom home when only a single-bedroom home is affordable, or to want a villa when a two-bedroom home would be more realistic.

Toning down expectations and making customers see what they can take on realistically is a key facet of risk management for home loan lenders — and by extension, the regulator.

This train of thought is what led the Reserve Bank of India to crack down on what it called ‘teaser’ loans way back in 2009. It was a product that was beginning to gather steam. It basically involved banks providing home loans at very low rates for the first two to three years and then moving customers to a floating rate.

SBI had introduced this product and had managed to create a dent in the market with it. Competitors protested before joining the bandwagon with similar offerings.

The product was clearly not popular with the RBI. Coming as it did in close proximity of the global crisis and its still unravelling causes of which the sub-prime crisis in the US was supposed to be the trigger, the regulator here played it safe.

The product was first given a bad name and in the then prevailing doctrine of financial stability over everything else, it was spiked soon after.

With the benefit of hindsight, it might be worth re-examining the reintroduction of the product once more — as SBI Chairperson Arundathi Bhattacharya suggested a week ago. As she put it, there was no difference in due diligence in the loans given under this scheme, implying that the regulator’s concerns were misplaced.

Besides, the biggest fear of the regulator that customers would be signing up for something unknown was also taken care of — interest rates for the next two years were fixed at progressively higher levels.

The naysayers

Now, there are many objections to reintroducing such a product. One, giving home loans (through this product) at below base rate (which is the lowest rate that a borrower can get), is something the RBI may not agree to, so as not to undermine the concept of base rate.

Two, a home loan is a function of the ability of the buyer, his job security, the price of the property as well as the interest rate offered. Interest rate is not the only deciding factor.

Three, real estate companies need to bring down their prices, liquidate their unsold stock of flats and pay off banks. A fear expressed by some lenders is that an unnaturally low interest rate may temporarily spur demand and let these builders off the hook once again. The much awaited price correction may, therefore, get further delayed.

And, finally, the RBI Governor’s point — that banks can bring down their base rate and benefit all borrowers, including home loan borrowers. So what is the need for a special dispensation only for home loan borrowers? There is merit in all the above objections.

Yet, given the market scenario — the increasing number of youth coming into the job market and the potential boom in housing needs that is ahead, every segment needs to do its bit.

A home loan product that offers lower interest rates in the beginning and higher rates in the subsequent years, is definitely a market need. Banks tell you that borrowers typically prepay their home loans as their income levels start rising.

So, for instance, if they have taken a 20-year loan, more often than not it is closed by the 13th or 15th year — as the income levels move up. Given these patterns, it is definitely worth considering if the market for home loans will not expand if the products are structured in a way as to move in tune with lifecycle and income earning cycles.

It is the absence of such structuring that deters many people from taking the plunge — when they could still benefit from relatively lower realty prices.

Yes, there are always some abuses and deviations by market players, but that ought not to deter banks from offering or the regulator from permitting a product that is required in the market. Build in safeguards that are necessary, but allow banks and customers to take calculated risks. And, oh, by the way, don’t call it teaser.

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