An insider's guide to easier home loans

Arecent report by rating agency, Fitch, highlights the fact that there is a possibility the recent spate of 'teaser' home loan schemes could lead to a 'payment shock' for borrowers.

Rakesh Rai | Print Edition: February, 2010

Arecent report by rating agency, Fitch, highlights the fact that there is a possibility the recent spate of 'teaser' home loan schemes could lead to a 'payment shock' for borrowers. Teaser loans have a fixed interest rate for one-two years, after which the rates jump to a higher level on a floating basis. So, if the interest rates rise sharply, there is a possibility that the borrowers' ability to repay is affected. According to the report, on an average, a percentage point increase in interest rates increases the monthly EMI by 6-8 per cent. However, there is no reason to panic, yet, since most bankers do not see a substantial increase in interest rates in the short term.

More interestingly, the report puts the spotlight on broad trends on defaulting patterns, which may help you gauge how banks evaluate a borrower's eligibility for a home loan.

Prepayments: The borrowers who make lumpsum prepayments have a relatively high degree of financial flexibility. Hence, it follows that this group typically experiences very low delinquency rates. In fact, the borrowers who are forced into an increase in their EMIs show the highest delinquency rates. But borrowers with discretionary incomes or personal savings enjoy the flexibility to prepay a home loan to keep the EMI payout in check even if the interest rates shoot up. It follows that prepayment rates will always keep pace with any hikes in a loan's interest rate.

Loan-to-value Ratio: This is the percentage of the property cost that is sanctioned by a bank for a loan. The higher the down payment paid by a borrower, the more his willingness to repay the loan since he has a higher stake in the property. However, the loans where the original loanto-value ratio exceeds 90 per cent are often the outcome of more stringent underwriting criteria, including authorisations from senior underwriting staff. As such, these loans have typically exhibited lower default rates.

Profile: By and large, borrowers with a salaried income exhibit default rates that are 20-50 per cent lower than the default rates of self-employed borrowers. An exception to this rule are self-employed professionals such as doctors and chartered accountants. This category exhibits default rates comparable with the salaried borrowers.

Geographical location: States such as West Bengal and Punjab have shown a higher default rate compared with the rest of the country. The relatively weaker performance in these regions could be attributed to lower levels of economic activity in specific sectors. Another factor could be the lack of underwriting and collection expertise. The loans originating in Delhi and Andhra Pradesh are at the other end of the spectrum, showing lower default rates in certain transactions. The report also highlights seasonal patterns that can influence your access to a home loan. For example, the collection efficiency of lenders varies with season. The highest efficiency is exhibited in March, which coincides with the end of a financial year.

The loan prepayment rates are as revealing. The highest prepayment rate is exhibited between March and June. This is understandable since this period usually corresponds with the time that a majority of salaried borrowers get their annual bonus payments. On the other hand, the period from September to December typically has a lower prepayment rate. Obviously, the festival-related spending in these months reduces a borrower's ability to prepay.

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