Teaser home loan rates pose payment shocks

Teaser home loan rates pose payment shocks
Business Standard, January 8, 2010, Section II, Page 3

BS Reporter / Mumbai

The teaser home loan rate, the interest rate which is set artificially low for the initial period, could give a ‘payment shock’ to borrowers as the equated monthly installment (EMI) shot up on lenders charging regular interest rates, according to Fitch officials.

At present, most of the commercial banks and some housing finance companies are giving home loans for up to three years at low fixed rate. Later, lenders would begin to charge regular rates. If these rates go up quickly at higher level, depending on the interest rate cycle, it is possible that borrowers may have to pay much large EMIs. Some borrowers, unable to absorb the sharp rise in payment obligation, could fail to pay up EMI on time.

It is important that borrowers understand that they may have to pay more after the end of the teaser period, Dipesh Patel, senior director, structured finance with Fitch said.

Meanwhile rating agency on Thursday said the performance of Indian residential mortgage backed securities (securitized paper) remained stable throughout 2009 due to low level of defaults and high amortization.

Fitch Indian Residential Mortgage (FIRM) delinquency index ranged between 0.90 per cent and 1.07 per cent, highlighting the low level of delinquencies forth 33 months beginning January 2007 till September 2009.

The new index will track 90+ days past due delinquencies of residential mortgage loans in securitized pool rated by Fitch. It conducted analysis on 25,800 loans with initial outstanding amount of Rs 2,000 crore.

The low delinquency trends in these transactions can be attributed to factors such as high borrower equity, low installment-to-income ratio and revision of loan payment schedules, it said.

In transactions under surveillance, the original loan-to-value (OLTV) ratio of loans was between 54 per cent and 76 per cent.

“The sizeable borrower’s equity of 30 per cent not only increases the borrower’s willingness to pay, but also provides the originator with a cushion against any potential correction in real estate prices”, agency said.

Lenders responded to the rising interest rates by providing mortgage loan borrowers with various revised payment schedules in accordance with transaction documentation. The options included first, lump sum prepayments: the borrower pays a one-off lump sum. Second, increase in loan tenure with unchanged EMI. And third, increase in EMI, with no significant increase in the tenure.

The average cumulative collection efficiency across the transactions has been stable over the last few years, in the range of 98.7 per cent to 99.3 per cent.

There is a seasonal pattern in collection efficiency, the highest being exhibited in March, which coincides with the financial year end in India. This may be associated with the enhanced collection efforts on the part of the originator during this period.

Fitch has observed that prepayment rates show a seasonal as well as a long-term trend. March to June of each year shows the highest prepayment rate.