Teaser rate home loans may spell trouble
The Hindu Business Line, January 8, 2010, Page 1
Fixed for now, the floating rate segment could upset your calculations.
Our Bureau, Mumbai
There is a possibility that the recent home loan schemes offering fixed-cum-floating rates could lead to a ‘payment shock' for borrowers.
These ‘teaser' home loans have a fixed interest rate for one-two years after which the rates jump to a higher level, said Mr Dipesh Patel, Senior Director, Structured Finance, Fitch Ratings.
If interest rates were to rise sharply, there is a possibility that borrowers' ability to repay will get affected.
An increase of 100 basis points in interest rates (prime lending rates), which translates into an average increase of 600-800 bps in monthly repayments, can be absorbed. But if rates were to increase by more than 100 bps, borrowers could find it difficult to pay, said Mr Patel at the launch of the ‘Indian RMBS (Residential Mortgage-Backed Securities) Performance Report' by Fitch on Thursday.
According to the report, the delinquency rate for residential mortgage-backed securities was low throughout 2009 mainly because of high borrower equity, low instalment-to-income ratio, and payment revisions granted by lenders.
The higher the borrower equity, the lower the delinquency, as there is greater willingness on the part of the borrower to service the debt.
A lower instalment-to-income ratio also indicates a higher ability to repay and, therefore, lower delinquency.
But in the case of teaser loans, where interest rates are significantly low for a defined initial period, the instalment-to-income ratio may increase significantly after the initial period, the Fitch report said.
The rating agency also launched the Fitch Indian Residential Mortgage Delinquency Index which tracks residential mortgage loans within the RMBS transactions publicly rated by Fitch and which are overdue by more than 90 days.
The index will enable investors to judge how the RMBS will perform. It will also be useful to mortgage lenders who can use the index to benchmark and compare the performance of their own mortgage portfolios, Mr Patel said.
The Hindu Business Line, January 8, 2010, Page 1
Fixed for now, the floating rate segment could upset your calculations.
Our Bureau, Mumbai
There is a possibility that the recent home loan schemes offering fixed-cum-floating rates could lead to a ‘payment shock' for borrowers.
These ‘teaser' home loans have a fixed interest rate for one-two years after which the rates jump to a higher level, said Mr Dipesh Patel, Senior Director, Structured Finance, Fitch Ratings.
If interest rates were to rise sharply, there is a possibility that borrowers' ability to repay will get affected.
An increase of 100 basis points in interest rates (prime lending rates), which translates into an average increase of 600-800 bps in monthly repayments, can be absorbed. But if rates were to increase by more than 100 bps, borrowers could find it difficult to pay, said Mr Patel at the launch of the ‘Indian RMBS (Residential Mortgage-Backed Securities) Performance Report' by Fitch on Thursday.
According to the report, the delinquency rate for residential mortgage-backed securities was low throughout 2009 mainly because of high borrower equity, low instalment-to-income ratio, and payment revisions granted by lenders.
The higher the borrower equity, the lower the delinquency, as there is greater willingness on the part of the borrower to service the debt.
A lower instalment-to-income ratio also indicates a higher ability to repay and, therefore, lower delinquency.
But in the case of teaser loans, where interest rates are significantly low for a defined initial period, the instalment-to-income ratio may increase significantly after the initial period, the Fitch report said.
The rating agency also launched the Fitch Indian Residential Mortgage Delinquency Index which tracks residential mortgage loans within the RMBS transactions publicly rated by Fitch and which are overdue by more than 90 days.
The index will enable investors to judge how the RMBS will perform. It will also be useful to mortgage lenders who can use the index to benchmark and compare the performance of their own mortgage portfolios, Mr Patel said.
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