The RBI (Reserve Bank of India) is the key source of every finance-related aspect in the country. Apart from being the banker’s bank or the last resort for every financial institution, there is much more the RBI is responsible for. One such responsible aspect is home loans. What does the RBI have to say about home loans in India, and what are the actual guidelines? Let’s find out everything the RBI says about home loans.
Overview of the Connection Between Home Loans and the RBI
The connection between home loans and RBI is significant, as the latter plays a central role in regulating the interest rates and liquidity in the financial system, which in turn impacts the availability and cost of home loans.
One of the primary ways the RBI impacts home loans is through its monetary policy decisions, particularly regarding the repo rate. The repo rate is the rate at which the RBI lends money to commercial banks, and changes in this rate often lead to corresponding changes in the interest rates offered on various loans. For example, if you are a HDFC bank customer, when the RBI reduces the repo rate, HDFC bank may lower its lending rates, making home loans more affordable for borrowers. Use the HDFC home loan calculator to find the EMI by adjusting the loan amount, tenure, and interest rate. It helps you identify a repayment plan that suits your financial circumstances.
RBI’s Guidelines for Home Loans in 2024
Let’s talk about the latest RBI guidelines. Shall we?
- The Repo Rate
The Reserve Bank of India has recently announced that it will keep the repo rate the same. The previous surge in the repo rate was witnessed in February 2023. The rates had been increased by 25 basis points, which had taken them to 6.5% from 6.25%.
- The Prepayment Charges
A home loan could even go up to Rs. 1 crore, in some cases even much more than that. However, the maximum tenure stands at 30 years. You could save money on your home loan only if you partly pay or completely before the tenure ends. This could be achieved when you get some extra cash. Therefore, in order to help home loan buyers prepay their loans, the Reserve Bank waived the prepayment charges in the case of floating interest rates and kept the penalty charges up to 3% in the case of a fixed interest rate.
Previously, the lender would ask for a prepayment penalty of up to 5% on the loan amount.
- Loan to Value Ratio
LTV, or Loan to Value Ratio, evaluates lending risks that a financial institution considers before offering a home loan to someone. To encourage individuals to own homes in the country and make home loans more affordable, RBI has increased the loan-to-value ratio to up to 90% in cases where the home loan is less than Rs. 30 lakhs.
The LTV ratio for loans above Rs. 75 lakhs is up to 75%. Therefore, the higher the loan to value ratio, the easier it would be for an individual to buy a property by financing it through a home loan.
RBI has also announced that registration charges, stamp duty, and documentation charges will not be included when calculating LTV. This reduces the 10% upfront payment that the home loan borrower must make.
If the cost of the house is less than Rs. 10 lakhs, banks will be allowed to add registration charges, documentation charges, and other charges to the house’s cost to calculate the LTV ratio.
- The Balance Transfer Option
In order to assist home loan borrowers and refinance home loans, RBI has waived off the foreclosure charges. Borrowers of home loans can now instantly transfer their home loans to another bank at much lower rates.
When you foreclose your home loan from the current bank, you will not have to pay the foreclosure charges. Let’s explain this through an example.
You borrow a home loan from a bank at 12%. You have been paying this bank’s EMI for a while now. Another bank offers you a loan at a much lower rate, let’s say 8.6%; you can transfer the balance of the home loan to the new bank’s loan. This reduces your interest burden. Moreover, since RBI has stopped foreclosure charges, you will also not have to pay foreclosure charges for the balance transfer you make for your home loan.
Things You Should Know Before Getting a Home Loan
There are quite a lot of things you might have to know before you can get a home loan, and some of them are listed below so you can keep a keen eye:
- Always Compare Home Loans Before Finalize on One
You might want to jump at the first option you get to avail of a home loan; instead, just make sure you compare different banks. Some banks would offer you better interest rates, tenure, and the amount of financing. Do not get the first offer in front of you; instead, choose from various banks with different perks to offer to you.
- Your Credit Score is More than Just a Score
You might be thinking of getting a home loan down the lane. However, if you have not been maintaining your credit score properly, your home loan could attract higher interest rates, lower tenures, and a lesser percentage of financing. Therefore, it is best to maintain a healthy credit score to avail yourself of a home loan with any financial institution. There are several steps you can take to maintain a healthy credit score, including paying bills at the right time, using a credit card in a proper manner, and much more.
- Plan the Tenure of Your Loan Precisely
The tenure of your home loan decides several factors, such as the amount of EMI you need to pay, how long you can keep paying this money, your income sources, and much more. For instance, longer tenures might seem like a good choice, but will you have a source of income for that entire tenure, or would you be ready to pay more interest? These are the kinds of questions you need to ask yourself. ?
- Make Sure You Have the Required Documents
Get all your documents in line before you can apply for a home loan. This will surely speed up the process and ensure your home loan is sanctioned faster and with ease.
To Sum Up
A home loan is a big step in anyone’s life. That is why it is important to know all its rules and regulations and all the considerations you need to make before taking this big step. If you are all set on getting this home loan, just follow the guidelines mentioned above, and we congratulate you on your new journey.