Everything to Know About RBI Guidelines for Home Loans

Most people in India rely on a home loan to fulfil their dream of being homeowners. The Reserve Bank of India (RBI) has imposed certain guidelines on housing loans to ensure complete transparency and offer enhanced convenience to the borrowers. Every registered lender in the country must follow these guidelines.If you are all set to achieve this milestone and searching for the best lender, it is essential to know these guidelines to ensure that the one you choose fully complies with all the rules and regulations. Here are some of the most important RBI guidelines on home loans-

The LTV or Loan-To-Value ratio is the maximum amount a borrower is allowed to borrow against the cost of the property. No lender will approve 100% of the cost of the property as a home loan. In 2015, the RBI made some significant changes to the LTV ratio of home loans.As per the current guidelines, a lender can approve up to 90% of the cost of the property if the cost of the property is up to Rs. 30 lakhs. For properties between Rs. 30 lakhs to Rs. 75 lakhs, lenders can approve up to 80% of the property cost. If the property costs Rs. 75 lakhs and above, the LTV can be up to 75%.The RBI has also stated that stamp duty, registration charges, documentation charges, etc., should not be included when calculating LTV. But note that this is the maximum LTV that a lender can approve. In no way this makes every borrower eligible for the same. Ultimately, it is up to the lender to finalize the LTV based on factors like loan tenure, property location, credit score, etc.

Borrowers also get the option to prepay their home loans to significantly reduce the total amount of interest they pay on their home loans. This is when a borrower wants to repay the loan, in part or in full, before the loan tenure. While prepayment facility was available before too, lenders used to charge a penalty of up to 5% of the outstanding principal amount on such prepayments.But in 2014, the RBI eliminated such prepayment penalties on home loans taken on a floating interest rate. However, the penalty is still applicable if a borrower wants to prepay a fixed-rate home loan. It can range from 1% to 3% between lenders.

The home loan balance transfer facility allows borrowers to switch their home loans, which are currently being repaid, to another lender. This is generally done when a different lender is offering housing loans at a lower interest rate. In order to switch a home loan to a different lender, the borrower first needs to foreclose the loan with the current lender.In simple words, this is done by taking a loan from the new lender and using the loan amount to foreclose the home loan taken from the previous lender. The borrower then starts repaying the loan to the new lender. But in the past, a foreclosure penalty was applicable on such transfers. The RBI has eliminated the foreclosure penalties on floating interest home loans.

Apart from the RBI guidelines for home loan listed above, there are a few general rules and regulations that a borrower should keep in mind-

• According to the RBI guidelines, lenders can approve home loans for applicants who fulfil the eligibility requirements, have a credit score of 750 or above, and can prove their repayment capacity.
• Borrowers should also submit documents related to their income and identification to be eligible for the loan.
• Borrowers should sign the loan agreement and agree to all the terms and conditions of the lender.
• The RBI also recommends that home loan borrowers should consider purchasing a home loan insurance to ensure that the loan can be repaid in case of their unfortunate demise and their family members don't have to carry the repayment burden.

While there is no shortage of home loan lenders in the country, it is essential for every borrower to be cautious throughout the process as they are about to make the biggest purchase of their lives. Therefore, thoroughly understand the guidelines to ensure that your lender provides you with all the benefits that have been made mandatory by the RBI.Ensure that you also thoroughly check the loan agreement before signing and make sure that the terms and conditions on paper are the same as discussed with you.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.