RBI Extends Home Loan Interest Rates Rationalization

RBI Extends Home Loan Interest Rates Rationalization

Real-estate industry | Apr 19, 2022 | 10 min read

The Reserve Bank of India (RBI) on Friday extended the rationalized home loan interest rates norms by another year till March 31, 2023. In October 2020, the Reserve Bank, as a countercyclical measure to deal with the pandemic situation, rationalized the risk weights by linking them only with Loan to Value (LTV) ratios for all new housing loans sanctioned up to March 31, 2022. The move is aimed at facilitating a higher credit flow of individual housing loans.

Reason for home loan interest rates rationalization extension

The Reserve Bank of India (RBI) on 6 April 2022, Wednesday unveiled the first bi-monthly monetary policy of the current fiscal. It said that risk weights for individual housing loans were rationalized by linking them only with the LTV  for all new housing loans sanctioned up to March 31, 2022. Recognizing the importance of the housing sector and its multiplier effects, it extended home loan interest rates rationalization till March 31, 2023, with the hope of higher credit flow to individual home loans.

The government has announced that such loans will continue to attract a risk weight of 35% where LTV is less than or equal to 80%, and 50% where it’s greater than 80% but less than or equal to 90%. The standard asset provision of 0.25% will also continue to apply to such loans.

While deciding the quantum of loan to be granted as housing finance, banks should abide by the following Loan to Value (LTV) and Risk Weights (RWs):

Category of LoanLTV Ratio (%)Risk Weight (%)
Individual Housing Loans
Upto ₹ 30 lakh≤ 8035
> 80 and ≤ 9050
Above ₹ 30 lakh & upto ₹ 75 lakh≤ 8035
Above ₹ 75 lakh≤ 7550

However, as a countercyclical measure, for individual home loans sanctioned on or after October 16, 2020, and up to March 31, 2022, the risk weights had been rationalized by the RBI as per the circular DOR.No.BP.BC.24/08.12.015/2020-21 dated October 16, 2020. The risk weights are as under –

LTV Ratio (%)Risk Weight (%)
≤ 8035
> 80 and ≤ 9050

These norms have been further extended by the RBI till 31st March 2023.

Industry reaction to interest rates norms extension news

Despite inflationary pressures increasing, the Reserve Bank of India Monetary Policy Committee (MPC) has continued with its supportive approach to economic growth and maintained a status quo on key lending rates.

The RBI has recognized the importance and multiplier effects that home loans have on our economy. By extending the applicability date for LTV ratio till March 31, 2023, they are making it easier than ever before to get a mortgage. The real estate market in India has been steadily recovering for a while now and these policies are going to help it continue on this positive trend.

Many are pleased with how rationalized risk weightage norms have helped to boost participation in this sector. Housing sales have increased sharply last year after a major setback in 2020 when demand plunged by about 50% due to the pandemic.

The all-time low-interest rate is one of the many reasons why people are buying homes.

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