Arecent report by rating agency, Fitch, highlights the factthat there is a possibility the recent spate of 'teaser' home loan schemescould lead to a 'payment shock' for borrowers. Teaser loans have a fixedinterest rate for one-two years, after which the rates jump to a higher levelon a floating basis. So, if the interest rates rise sharply, there is apossibility that the borrowers' ability to repay is affected. According to thereport, on an average, a percentage point increase in interest rates increasesthe monthly EMI by 6-8 per cent. However, there is no reason to panic, yet,since most bankers do not see a substantial increase in interest rates in theshort term.
More interestingly, the report puts the spotlight on broadtrends on defaulting patterns, which may help you gauge how banks evaluate aborrower's eligibility for a home loan.
Prepayments: The borrowers who make lumpsumprepayments have a relatively high degree of financial flexibility. Hence, itfollows that this group typically experiences very low delinquency rates. Infact, the borrowers who are forced into an increase in their EMIs show thehighest delinquency rates. But borrowers with discretionary incomes or personalsavings enjoy the flexibility to prepay a home loan to keep the EMI payout incheck even if the interest rates shoot up. It follows that prepayment rates willalways keep pace with any hikes in a loan's interest rate.
Loan-to-valueRatio: This is the percentageof the property cost that is sanctioned by a bank for a loan. The higher thedown payment paid by a borrower, the more his willingness to repay the loansince he has a higher stake in the property. However, the loans where theoriginal loanto-value ratio exceeds 90 per cent are often the outcome of morestringent underwriting criteria, including authorisations from seniorunderwriting staff. As such, these loans have typically exhibited lower defaultrates.
Profile: By and large, borrowers with a salariedincome exhibit default rates that are 20-50 per cent lower than the defaultrates of self-employed borrowers. An exception to this rule are self-employedprofessionals such as doctors and chartered accountants. This category exhibitsdefault rates comparable with the salaried borrowers.
Geographicallocation: States such as WestBengal and Punjab have shown a higher defaultrate compared with the rest of the country. The relatively weaker performancein these regions could be attributed to lower levels of economic activity inspecific sectors. Another factor could be the lack of underwriting andcollection expertise. The loans originating in Delhi and Andhra Pradesh are at the other endof the spectrum, showing lower default rates in certain transactions. Thereport also highlights seasonal patterns that can influence your access to ahome loan. For example, the collection efficiency of lenders varies withseason. The highest efficiency is exhibited in March, which coincides with theend of a financial year.
The loan prepayment rates are as revealing. The highest prepayment rate isexhibited between March and June. This is understandable since this periodusually corresponds with the time that a majority of salaried borrowers gettheir annual bonus payments. On the other hand, the period from September toDecember typically has a lower prepayment rate. Obviously, the festival-relatedspending in these months reduces a borrower's ability to prepay.