In what could spell a major relief for homebuyers hit by a volatile floating rate loans, the National Housing Bank (NHB) has planned to use a significant portion of tax-free bond proceeds to shore up long term fixed-rate mortgage loans especially for low and moderate income housing in urban areas and suburbs. This is a part of NHB’s broader strategy to bridge the demand-supply gap.
NHB raised Rs 4,000 crore in tax-free bonds in 2013-14 and another Rs 3,200 crore in low-cost funds from overseas last fiscal. NHB will use these funds to refinance banks and housing finance companies (HFC), which in turn will roll out long term fixed rate loans upto Rs 10 lakh to borrowers. The tenure for these loans will have to be 15-20 years.
"We are keen on developing long-term fixed rate mortgage market and will use the proceeds of the tax free bonds (fixed rate for 15/20 years) largely for better asset-liability maturity matching," NHB chairman and MD RV Verma told FE.
“We are keen on developing this product especially for low and moderate income households who can be protected against the volatility in the floating rates, which is also a credit risk for the lenders," he said.
Banks and HFCs offer a majority of home loans at floating rates, which are linked to the base rate or benchmark prime lending rates, as lenders don't have recourse to long-term funds and, hence, pass on the short-term risks to borrowers. This has led to a sudden spurt in either the monthly EMIs or the repayment periods and sometime both, whenever RBI raises rates.
Although some HFCs and banks do offer fixed rate loans, it comes at least 1.5-2 percentage points higher than floating rates now at 10.5-11%. This discourages homebuyers from opting for fixed rate loans. With CPI inflation remaining above 10% in the past two years, RBI has maintained a tight monetary policy and this in turn has kept mortgage rates high and choked demand especially from the middle-income and low-income segment.
In India, the housing shortage is 18.7 million and 90% of it is in the economically weaker section and low-income group. “The potential in this segment is huge,” Verma said.
NHB had recently announced a reduction of interest rate on its special refinance scheme to 8.25% from 8.5% for loans up to Rs 5 lakh. For loans upto Rs 10 lakh, the NHB decided to cut rates to 8.5% from 8.75%. The scheme is aimed at ensuring long term fixed rate refinance at affordable interest rates to build or buy houses in urban areas. This is targeted at low and moderate income segments. Refinance extended to Primary Lending Institutions (including banks, HFCs and lenders in the cooperative sector) is for 5-15 year tenures at fixed rates.
NHB also has a solar lighting and heating scheme (where long term funds are given at concessional rates of interest at fixed rates), where refinance for loans is extended for purchase and installation of solar powered devices for household use. This scheme is also operated through PLIs.