Are you brave enough to venture out and buy a home in the season of COVID-19? Headwinds are stronger than you expected. Banks are less likely to entertain your request for a home loan. Rest assured. The bankers are not viewing your credit score with suspicion.
It is not about you. It is about falling interest rates and real estate valuation. Banks are at an increasing risk due to the macroeconomic trends.
There was a time when someone who owned land with valuation of Rs 50 lakh could expect to get a loan of up to 80 per cent of his asset, or Rs 40 lakh, to build a house. As the property rates fall, you may have to find other ways to fund construction.
As risk on investments increase and interest rates fall, banks have to work with squeezed margins while offering home loans. Revised home loan rates in most banks are at a range of 6.8 per cent to 6.9 per cent. Since home loans have to be based on the RBI’s external benchmark, banks have little leeway in tinkering with repo-based loan slabs. This limits the banks’ margins.
Banks started offering loans based on the rates as per the RBI’s directive from last year. Since these loans are three-month contracts, interests cannot be revised immediately. New loans, however, will be affected by such procedures.
Current regulations prompt banks to cut back on loan offers or to discourage them totally. Banks earlier lend to customers huge sums even if that meant they were expecting to receive about 30 per cent of the take-home pay check as monthly instalments. Banks were lenient in this. In some cases, the EMIs touched half of the pay checks.
However, the scare triggered by COVID-19 has prompted banks to be more careful in offering loans and ensuring the potential for repayment. The health crisis and the resultant economic slowdown can hamper customers’ ability to repay debt.
Banks cannot guarantee to claim their investment in loans since the value of collateral also goes down due to lower valuation of real estate properties. In this scenario, credit score of a potential customer becomes all the more important, both for the applicant and the lender.
As revenue from home loans slide, banks may be looking closely at lending to houses already under construction. You have to do rigorous market research before taking a decision on building your dream house now.
You would do well in ensuring that you are not shouldering more financial liability in these uncertain times.