RBI Home Loan Guidelines 2023

The Reserve Bank of India is the highest banking and financial authority in India. Along with the Government of India, the central bank revamps and updates its policies to publish RBI guidelines for home loans every year. The guidelines specify the home loan rules that are to be followed by lenders as well as borrowers. Home loan rules and regulations keep on changing. Read this blog to track the latest notification and be an informed borrower.

RBI Guidelines for Home Loan 2023 – Recent Updates

Owing to the consistent rise in home loan interest rates and loan tenure since May 2022, the new RBI guidelines for home loans have been announced. RBI released its latest notice on 18th August 2023 in view of the prevailing situation of the country’s financial sector. The central bank has claimed that the new home loan rules will bring in standardisation and uniformity. The regulator has instructed all lenders to extend the changes to existing and new home loan accounts by December 31, 2023.

Several consumers have been complaining to the central bank about miscommunicated elongation of loan tenures or increases in monthly installments by the banks. The recent notification seeks to establish greater transparency and communication between lenders and borrowers.

Check out some of the recent headlines regarding the RBI’s latest move. 

“New RBI rules to regulate penal charges on loans to come into effect from next year. Seven things to know” – The Mint, 18 Aug 2023

“RBI’s new guidelines: Home loan borrowers can switch to fixed-rate at reset” – Business Standard, 28 August 2023.

RBI allows switch from floating to fixed rate regime: What do new personal loan guidelines say? – The Indian Express, 18th August 2023.

RBI Guidelines for Home Loan

The RBI home loan rules are updated at regular intervals according to the fluctuating economic situation of the country.

Shift Between Fixed and Floating Interest Rates

The central bank has mandated lenders to allow borrowers to shift from floating rates of interest to fixed interest rates on home loans at the time of the interest reset period. Further, RBI has also instructed the lenders to maintain transparency in disclosing the charges involved in such a transition. These charges are to be clearly communicated in the loan sanction letter and at the time of revision of rates.

Penal Charges vs Penal Interest

Under the RBI home loan guidelines 2023, the regulator has instructed banks and other NBFCs to discontinue levying penal interest, over and above existing interest rates, upon loan defaults. The central bank has instead encouraged the lenders to levy penal charges for issues such as late payments and others. However, RBI mandates the imposition of penal charges only after a transparent disclosure of such charges to the customer.

Prepayment Charges

As per the latest RBI home loan guidelines 2023, the banks must allow the borrowers to either increase their EMIs or loan tenures and repay the loan in part or full at any point in time. The new home loan rules also guide the banks to ensure that an increase in loan tenure does not lead to negative amortisation. This implies that the interest payments are to be solely included in EMIs and not to be added to the outstanding principal amount or carried forward to the next month.

Loan to Value Ratio (LTV ratio)

The LTV ratio indicates the maximum value of a property that can be financed by a lender. It is a ratio of the sanctioned loan amount to the property’s value. RBI’s home loan rules and regulations allows banks and other lenders to finance property purchases up to a maximum of 90%. RBI also states that additional charges such as the processing fee and stamp duty among others are not to be included in the LTV.

Check out the available LTV ratio for different brackets of home loan amounts. 

• For home loans worth ₹30 lakhs or less, lenders can offer up to 90% LTV.
• For home loans between ₹30 lakhs and ₹75 lakhs, lenders can offer up to 80% LTV.
• For home loans worth ₹75 lakhs or more, lenders can offer up to 75% LTV.

Repo Rate

The repo rate refers to the cost of borrowing money from the Reserve Bank of India. The rate is controlled by the central bank in response to the inflationary pressure in the economy. A high repo rate induces the banks to levy higher rates of interest on home loans and vice-versa. The latest rise of the repo rate to 6.5% increased the home loan interest rate by 25 points. Higher interest rates further lead to higher monthly EMIs.

Loan Tenures

Home loan tenures refer to the time period within which a borrower is required to repay their principal and interest obligations. As per RBI guidelines for home loans, lenders can extend a home loan for a maximum of 30 years. This period is extendable only in specific circumstances upon due consideration by the lender. Borrowers failing to repay the loan within this time frame stand the risk of losing their property and face other penalties.

Easier Balance Transfer

RBI has significantly regulated foreclosure charges in order to ensure smoother refinancing of home loans. Borrowers can now easily transfer their home loans to other lenders to avail of lower interest rates. This move has provided much relief and respite to existing home loan account holders.

Considerations & Tips

Home loans are major financial decisions of an individual’s life. While one part of staying informed is knowing all the home loan rules and regulations. The next part is following the best practices while actively applying for a home loan.

Check out the top tips and practical hacks to keep in mind while applying for a home loan.

• Submitting a reasonable request: An applicant is always advised to properly assess their needs and then apply for an amount that aligns with their income. Requesting loan amounts that are within the candidate’s repayment capacity lends them great credibility. The banks swiftly approve such loan applications and ensure quick disbursals of loan amounts.
• Compare Loan Options: A prospective lawyer must never say yes to the very first offer they lay their eyes on. With multiple lenders available, a borrower is likely to gain competitive interest rates owing to strong market competition. One must remember that it is a bank that needs the customer more and not the other way around. Hence, comparing different loan options and then making a choice always goes a long way.
• Loan Tenure: As per the RBI guidelines for home loans, banks can offer home loans for a maximum period of 30 years. However, the borrowers must realise that the higher the loan tenure, the higher will be the interest outflows. In order to make sure that you do not overpay on your loans, choose the lowest loan tenure possible.
• Down Payment: The borrower’s share of financing the property is referred to as a down payment. As the RBI home loan guidelines 2023 allow the banks to cover up to 90% of the property’s value, the borrower is required to arrange for down payments ranging from 10%-25% of the property’s value.
• Credit Scores: Banks and NBFCs prefer applicants with high credit scores while approving home loan requests. An applicant must improve his credit ratings before applying for a loan to enhance their home loan eligibility. A credit score of 750 or more is usually considered a strong rating.
• Prefer increasing EMIs upon prepayments: This is specifically for existing borrowers. If financially feasible, the borrower should prepay the loan. Upon prepayment, they must choose the option to increase monthly instalments for the remaining amount rather than increasing the loan tenor. This will minimise interest outflows and ensure greater savings for the borrower.

Summary

The central bank has consistently guided the lenders to make adequate considerations of the borrowers’ financial standings while extending loans to offer fair terms. Through the RBI home loan guidelines 2023, the bank has instructed the lenders to periodically communicate essential details in a simple manner to their customers. As of now, fixed rate home loans aren’t widely available. With the recent move, the visibility of fixed rate home loans are all set to soar.