Will an increase in the rate of interest have an impact on the asset quality of house loans? The information that you need is as follows.
- ByStartupStory | November 10, 2022
House loans companies (HFCs) have a difficulty when interest rates go up, and their typical response is to raise equivalent monthly installments (EMIs) while maintaining the same number of years for loan repayment. Should those who have taken out house loans be concerned about anything in particular? Even though house loan borrowers would have to pay more each month due to continued rate rises, the rating agency ICRA believes that this will not affect the borrowers’ ability to make their repayments on their loans.
Given that the prime home loan segment already has long tenures, mortgage lenders have limited room to extend the loan tenures. A further extension in loan tenures will lead to overall tenures extending beyond the working life of the borrower, according to the rating agency. Mortgage lenders have limited room to extend the loan tenures because of this.
As a consequence of this, equivalent monthly installments (EMIs) for prime house loans would increase by 12-21 percent, while the same would increase by 8-13 percent in the case of the affordable house loans category, according to Manushree Saggar, its sector head for financial sector ratings.
“Since it is anticipated that there will be a further rise in interest rates, but lenders have a limited amount of wiggle room when it comes to increasing house loans maturities, monthly installments will need to be adjusted higher. Despite this, it is very unlikely that this will have a substantial influence on the HFC’s asset quality metrics “Saggar stated.
Even with the new EMIs, it is anticipated that the fixed obligation to income ratio (FOIR) would grow by less than ten percentage points, and will thus continue to be manageable, unless the initial loans were provided at aggressive FOIRs, she noted.
Since May of this year, the Reserve Bank has responded to the out-of-control inflation by raising interest rates by a total of 1.90 percentage points. These rate increases have been passed on to house borrowers in the form of higher interest payments.
Icra said that the anticipated rise in revenue levels as a result of the improvement in the operating environment may help to somewhat offset the predicted rise in the number of FOIRs.
Why house loans are taken out for properties
Since most home loans are taken out for properties that are already inhabited by their borrowers, the asset quality of home loans is enhanced by the fact that monthly home loan payments (EMIs) are given precedence over other commitments.
In addition, given the competitive market space, lenders might not pass on the entire increase to end borrowers. As a result, the impact on EMIs might be further limited, the report stated, pointing out that housing finance companies have increased the lending rates by approximately 0.50-1 percent in H1 FY2023, compared to the 1.90 percent hike in benchmark repo rates.
The monthly debt load of borrowers may be managed by certain lenders via the use of a hybrid strategy that involves modifying both the EMI and the tenures of the loans, which can lead to improved payback rates.
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