Rate hikes trigger Home Loan Defaults

May 8, 2007: Housing loan defaults are rising as per many bankers. This is because many borrowers, who buy houses as an investment, have started defaulting following the hikes in interest rates.

To stop such defaults, some banks are planning to insist on affidavits from first-time borrowers stating they do not own another house.

Banks feel many people have been borrowing to buy houses to ride on the current property boom. Such investors sell out after a while to cash in on the rise in property prices. However, when interest rates go up, such buyers tend to default.

The balance sheet may show net NPAs coming down, but that is more because of write-offs and provisioning. The highest rise (in NPAs) is in real estate, particularly in housing loans.

To reduce the impact of rising rates on mortgage lenders, the central bank cut the risk weights on home loans to 50 per cent from 75 per cent on April 24.

Banks also feel interest rates have nearly peaked and the central bank would not tamper with them for some time.
“The Reserve Bank may be ‘restrained’ from raising rates further to tackle inflation because of the risk of an increase in bad debts, which have never crossed 2 per cent of banks’ advances to home loan borrowers”.

Source: business-standard