Under stress. Home loan borrowers opt for pre-payments, balance transfer amid successive rate hikes

Amid rising interest rates and muted investment returns, lenders have seen an increase in part pre-payments and loan balance transfers by home loan borrowers, especially in metro cities or from high end customers.

“There is an increase in part pre-payments or pre-payment of dues, and transfer of home loans compared with H1 FY23. People from the high income and metro segments that buy houses for investment and other purposes, are certainly evaluating such opportunities,” said HT Solanki, General Manager of mortgages and other retail assets at Bank of Baroda.

Further, because the loan ticket size in metros is usually higher, even a small rate change can translate to a significant amount in absolute terms, encouraging borrowers to try and pay as much upfront or look at other lenders that offer better rates, industry participants said.

It is also more beneficial for borrowers to deploy their surplus funds to repay debt obligations rather than invest, as most investment and savings returns continue to be sub-par compared with home loan rates, a participant said. They added that this also includes investors who may have booked profits when markets peaked and are now choosing to ‘sit on cash’.

Lenders under pressure

Since May, RBI has increased the repo rate by 225 bps to reign in elevated inflation. The comparative increase in lending rates has been slower as lenders have so far chosen to absorb some of the impact or raise rates in a staggered manner.

Home loans, usually being of a long-term nature, also allow lenders the benefit of increasing the loan tenure rather than hiking the borrowers’ EMI--which could put financial stress on the borrower.

However, the aggressive pace of rate hikes is now forcing lenders to start increasing the EMI amount given the limited headroom to extend the repayment period further, especially for borrowers over a certain age bracket.

“The repayment periods are reaching a saturation point. Normally, lenders set an internal cut-off in terms of the entry age of the borrower and the eventual maturity of the loan. This limit is being breached and lenders don’t have any other option than increasing rates,” said Amit Diwan, Chief Business Officer at IMGC (India Mortgage Guarantee Corporation).

Borrowers with shorter loan tenures are seen the most hit as any increase in rates has a much sharper impact on the monthly installments. For example, a 2.5 per cent rate increase for a 20-year loan would result in the EMI rising by 6-7 per cent, compared with a much sharper increase of up to 20 per cent in a shorter 12-14 year loan, an industry participant explained.

Borrowers feel the heat

Given the typically floating nature of home loans, a significant portion of the loans carrying a higher rate are still fresh loans. This has enabled banks to give up to 20-25 bps of discounts on loan rates to borrowers with high credit scores, that are looking to transfer their loans, a banker said.

As a result, the level of pre-payments remains below the peak levels of 2017-2018 so far. However, market participants believe that if the rate hikes continue and as these loans mature, lenders — especially those that deal with HNI clients such as foreign banks — will see a further rise in pre-payments and balance transfers January onwards.

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