The number of people pre-paying their home loans to avoid higher EMIs has risen by 15% says India's largest private sector bank.
ICICI Bank, the country's second-largest mortgage lender, says it has witnessed a 15% jump in foreclosures following interest rate hikes, as more borrowers want to pre-pay home loans to avoid higher interest burden. The bank feels there has been a 35% decline in home sales in the past 18 months. This drop does not take into account the impact of the latest round of rate hikes.
"Unlike in the US, where foreclosure would mean borrowers sending keys to the banks, here it's complete payment of loan before schedule. As interest rates rise, borrowers tend to go in for pre-payment," says ICICI Bank retail asset head Rajiv Sabharwal.
ICICI Bank has hiked home loan rates twice in a little over past two months by 75 basis points. The bank is offering a floating home loan rate of 12.25% at present.
Mr Sabharwal says the bank hasn't seen a significant rise in home loan defaults, but has turned cautious towards lending as risk has risen. "We made our loan disbursal norms stringent as home prices went up earlier. With rates going up now, we are naturally being more cautious," he says. In order to ensure that the EMI burden doesn't rise so much as to force a home buyer to default, banks restructure loans, generally increasing the loan tenure.
The average tenure at ICICI Bank has increased from 13-14 years to 16 years in a year's time.
Meanwhile, a higher mortgage rate has also reduced a home buyer's eligibility to borrow. At ICICI Bank, a home buyer is now able to borrow 5-10% less than what he could have a year ago with same level of income. So while home prices have gone up in a year, a person's ability to buy a home has actually gone down. Thus, one could now afford only a smaller home than what he could have got a year ago.
Besides, ICICI Bank is now focusing on lending to end-users and not investors. "If you have bought a house to live in, you are more likely to continue paying EMIs even though interest rates go up," says Mr Sabharwal, indicating that investors were more likely to default.
Much of the investors have already exited or are on their way out from the real estate sector given the downturn, which is unlikely to give them any significant return.
Source: Economic Times, Dated-1 Sep, 2008
