Understanding loan to value under new RBI norm

Written by Adhil Shetty | Updated: May 18 2012, 08:49am hrs
BankBazaar.com CEO Adhil Shetty explains how loan to value ratio and how stamp duty will not form part of the property cost and impact on borrowers

The Reserve Bank of India has brought about many new directives and guidelines in order to curb speculation in the property market as the sector stands poised for a revival post recession recovery. One of the guidelines that has dampened the mood of real estate developers as well as prospective home buyers is the exclusion of stamp duty, registration fees and all other allied charges while calculating the loan to value when taking a home loan.

Understanding the loan to value

Simply stated the loan to value (LTV) is the ratio of the amount that you wish to borrow for a home to the actual value of the home. The LTV can be calculated from the actual worth of the home, the mortgage being taken and the down payment that has been made prior to the loan. For example, the value of a house is R40,00,000 and a down payment of R400,000 has been made a loan of the balance amount that is R36,00,000 is being sought. In this case the LTV comes to be R36,00,000 of the actual value of R40,00,000, which works out to 90%. Thus the LTV is 90%.

What the new RBI guidelines imply

This guideline implies that the borrowers will now have to pay a higher amount from their resources as the loan that can be approved by the banks will be reduced by about 5 % to 10 %. The stamp duty varies from 5 to 10 % of the value of the property and the registration fees are about 5% of the value. Additionally, there are a few charges such as VAT and service charges of which about 2% may be applicable in certain cases. All these charges were earlier included in the total cost of the house and then 80 % of the total cost was financed by the banks. This new guideline will exclude such charges while calculating the value of the property and these expenditures will have to be borne by the borrower. Thus the buyers contribution will increase from a pervious figure of 10 % to 15 % to about 20 % to 25 % of the value of the property.

The real estate developers are also apprehensive about the impact of these new guidelines and feel that the move may adversely affect the sales. This additional burden in the down payment structure may discourage the buyers from taking a loan and buying a house. However, the banks are confident that there will not be much impact as the buyer is now actually taking a smaller loan, which will imply lesser interest and smaller EMIs

Why such a norm

The RBI has stated two primary reasons for taking such a step in the current financial situation. Firstly, this will discourage speculation in the housing sector and people will use home loans for buying houses to reside and not as an investment in this booming sector. The second aim of the RBI in this guideline is to keep the lending market protected in case of a surge of defaulters and delinquency. Such a move will ensure that the borrower is taking a loan that he is actually capable of repaying and in case he does not the bank is in a position to retrieve its money by disposing the property to recover a lower loan amount.

Getting around this guideline

As on date this guideline is applicable only to the banks that give home loans and housing finance institutions like the LIC housing, HDFC, etc, are still providing up to 80% of the total cost of the property which includes the stamp duty and registration fees. However, this anomaly may not go over looked for long and the same restrictions will become applicable for these institutions also, eventually.