BANGALORE: There is some good news for prospective homebuyers. The National Housing Bank (NHB) is focusing on bridging the demand-supply gap. Recently, the NHB decided to use a significant portion of its tax-free bonds’ proceeds to shore up long-term fixed-rate mortgage loans, especially for the low income and middle income housing in urban areas and suburbs.
NHB raised Rs 4,000 crores in tax-free bonds in 2013-14 and another Rs 3,200 crores in low-cost funds from overseas last fiscal. It will use these funds to refinance banks and housing finance companies (HFCs), which in turn will roll out longterm fixed-rate loans of up to Rs 10 lakhs to borrowers. The tenure for these loans will have to be 15-20 years.
NHB is trying to develop the long-term fixed-rate mortgage market. It plans to use the proceeds of the tax-free bonds (fixed rate for 15 to 20 years) largely for better asset-liability maturity matching. The product will cater to the low income and middle income households who can be protected against the volatility in the floating rates, which is also a credit risk for lenders.
The banks and HFCs offer most of their home loans on the floating rate, which is linked to the base rate or benchmark prime lending rate, as lenders don’t have recourse to long-term funds. This tends to pass on the short-term risks to borrowers. This in turn leads to a sudden spurt in either the EMIs or the repayment period, and sometimes even both, whenever the Reserve Bank of India (RBI) increases the benchmark rates.
It is to be noted that even though some banks and HFCs do offer fixed rate loans, it comes at about two percentage points higher than the floating rate loan that is now at 10.50 to 11 percent. As such, it acts as a disincentive to homebuyers and stops them from opting for a fixed rate loan.
As the Consumer Price Index (CPI) based inflation rate has remained above 10 percent in the past two years, the RBI maintained a tight monetary policy. In effect, this move has kept the mortgage rates high.
The NHB has underlined the housing shortage of 18.70 million units and that 90 percent of it is in the economically weaker sections and low income group segments. As such, the potential in these segments is huge and untapped.
In addition, the NHB recently announced a reduction in interest rate on its special refinance scheme to 8.25 percent from 8.50 percent, for loans up to Rs 5 lakhs. For loans up to Rs 10 lakhs, the NHB decided to cut the rate to 8.50 percent from 8.75 percent. The scheme is aimed at ensuring long-term fixed-rate refinance at affordable interest rates to build or buy a house in an urban area. This scheme is targeted at the low income and middle income segments.
Further, the refinance extended to primary lending institutions including banks, HFCs and lenders in the cooperative sector is for 5-15 year tenures at fixed rates.