Higher loan-to-value on mortgage cover likely; home loan borrowers to gain

The Reserve Bank of India is considering allowing flexibility to home loan providers to breach its loan-to-value (LTV) ceilings in the event the borrowing is backed by mortgage guarantee.

If RBI permits such flexibility, lenders would  extend higher loans against a property. It will hugely benefit home loan borrowers since they would have to put in lower down payment at the time of availing credit. This would, in effect, lead to higher loan offtake and provide a boost to the Indian realty market.

The Central Bank is in talks with the India Mortgage Guarantee Corporation (IMGC) to consider the possibility of allowing lenders the flexibility. “We are working with RBI to allow LTV caps to be breached provided there is a mortgage cover since there is an additional protection to the lender. This practice is in existence in many markets. We have provided them a lot of data from other markets where this flexibility is permitted,” Amitava O Mehra, Chief Executive Officer, India Mortgage Guarantee Corporation, the sole mortgage guarantee provider in the country, told FeMoney.

The present RBI norms provides three broad categories on LTV ceilings. For property of to Rs 30 lakhs, the LTV is 90 per cent, while for those between Rs 30 lakhs and Rs 75 lakhs the LTV is 80 per cent and for homes above Rs 75 lakhs the ceiling is 75 per cent.

As an illustration, an LTV ceiling of 80 per cent means that a lender is permitted to extend a maximum loan amount of Rs 40 Lakhs on Rs 50 Lakh property with the borrower required to put in the remaining 20 per cent or Rs 10 lakhs from own savings.

Mehra said that the flexibility to breach the LTV caps on the back of mortgage guarantee is being sought because IMCG provides cover to a portion of the loan. Mortgage guarantee provides that if a loan becomes an non-performing asset (NPA), IMGC steps in and makes the payment to the extent agreed. IMCG provides cover between 10-35 per cent of the entire loan amount. “We really bring value to the whole loan deal. The lender is better off with the guarantee than without our product,” he said.

In a recent report, rating agency ICRA has said by helping lender to release capital, mortgage guarantee would allow lenders to achieve higher business volumes for a given capital structure and would help increase mortgage penetration in the country.