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Conservative underwriting standards are crucial to the performance of mortgage loans, according to India Ratings & Research.
Moreover, a hike in interest rates beyond a certain threshold leads to accelerated fresh defaults in loans that are otherwise performing.
A study of loan performance in the three-year period (2010 to 2013) of rising interest rates, suggests the loans that faced over 2 per cent hike in rates were 50 per cent more delinquent than the average during the same period. The study included only those loans that were being repaid on time at the beginning of the rate hike cycle.
Key indicators While studying the impact of underwriting standards, both the instalment-to-income (IIR) ratio and loan-to-value (LTV) ratio were found to be important predictors of mortgage delinquency.
“Loans to residential mortgage borrowers, whose repayments were above 50 per cent of their income, were found to be riskier with delinquency rates almost 35 per cent higher than the average,” said Purav Shah, Associate Director - Structured Finance at India Ratings.
Likewise, borrowers who contribute over 40 per cent towards the purchase of a house (LTV below 60 per cent) have shown greater willingness to pay, with nearly 25 per cent lower delinquency rates than the average.
While high delinquencies were observed at high LTVs, underwriting practices have been made stringent for loans with LTV over 80 per cent, by limiting IIRs to 50 per cent for such loans, the report said.
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