Interest rate on home loans to fall 25-30 basis points more

Interest rate on home loans is likely to come down by another 25-30 basis points (bps) over the next few months, triggered by the Reserve Bank of India’s (RBI) move to lower risk weights on select home loans (up to Rs.75 lakh) where borrowers are willing to put in more money and thus lower the loan-to-value (LTV) ratio, according to Crisil Research report.

Theoretically, lower risk weights should significantly boost the return on equity (RoE) of the mortgage portfolio of banks.

However, with competition in home loans continuously intensifying and the interest-rate cycle turning south, we believe this is unlikely, and banks will have to pass on the benefit to borrowers. Therefore, any boost to RoE would be marginal, the research report says.

Crisil estimates that around 80 per cent of home-loan borrowers and 70 per cent of home loans (by value) would meet the criteria for lower risk weights set by the RBI and thereby benefit from the change in regulation. LTV ratios for home loans have been moving down over the years. Data on home loans disbursed across 13 cities show average LTV has come down from 75 per cent in the third quarter of fiscal 2010 to 66 per cent in the same quarter of fiscal 2015. This means a higher proportion of new loans would meet the criteria for lower risk weights.