Soon, Buying Property Insurance Could Mean Cheaper Home Loans

It came as a major disappointment to real estate developers when in its sixth bimonthly monetary policy review on February 8, the Reserve Bank of India (RBI) left the repo rate—the rate which the Central bank lends money to commercial banks—unchanged at 6.25 per cent.  Finance Minister Arun Jaitley, too, conceded: "All finance ministers have a perpetual desire (of lower rate) but, at the end of the day, we all respect the decision that (the) RBI takes."

But, there was nothing for which home buyers must have lost their composure. After the Centre through a demonetisation process turned high-value currency notes invalid on November 8, banks were flush with deposits and reduced interest rates by as much as 90 basis points (one per cent is equal to 100 basis points) . Further reduction in rates by banks was highly unlikely even if the RBI decided to go for a cut on February --- rising credit cost and low loan growth did not leave any scope for a further reduction even though RBI Governor Urjit Patel nudged banks to go for deeper cuts. "The average lending rate reduction (by banks) has been less. We feel there is some scope for further reduction in lending rates," Patel told media.

Now, while developers and prospective buyers are waiting for the Central bank to cut key rates in its next policy review in April and lead banks by example, home loans are all set to get cheaper even if the RBI's “neutral” policy stance stops it from doing so.

According to media reports, the National Housing Bank (NHB) along with the Indian Institute of Insurance is working to build a framework that could bring down the cost of home loans by 50 basis points if a borrower opted for a property insurance.

It is worth mentioning here that home insurance protects you against damage arising due to natural calamities such as earthquakes, floods, cyclone, lightning or human-made such as terrorism, vandalism, etc. This is not to be confused with home loan insurance, under which the loan you take for buying the property is insured.

Also read: How Is A Home Insurance Different From Home Loan Insurance?

From developers' point of view, if borrowers opt for a property insurance, the risk premium would come down, a benefit that developers will eventually share with property owners. From home buyers' perspective, while they will have to pay extra on buying property insurance, the cost of their loans would go down and the availability of funds would increase.  Considering banks often compel borrowers to buy a property insurance along with the loan without offering any incentives, this would sweeten the deal for buyers—earlier you bought a property insurance because it looked like a condition to get the loan; now, you buy a property insurance and also get cheaper loans.

According to rating agency ICRA estimates, if you pay an equated monthly instalment (EMI) of Rs 874 at 8.6 per cent for Rs 1 lakh loan amount taken for a 20-year tenure, a cut of 50 basis points would mean you pay only Rs 842 for the same loan.

"Such measures, if finalised, should help borrowers. While it would potentially benefit them in improving the risk profile, their loan eligibility, too, may expand either through lower rates or more credit. The cost of the insurance cover is likely be borne by borrowers, but still it will benefit home buyers as it could be nominal compared to higher rates," The Economic Times quoted ICRA Senior Vice-President Karthik Srinivasan as saying.

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Cautious RBI Leaves Rates Unchanged