The Reserve Bank of India's has finally eliminated the concept of teaser rates from the country's home loan market. Coupled with the central bank's insistence that borrowers put down at least 20% of the cost of a home, this changes the home loan landscape considerably.
Both these measures have been taken to make the banks' home loan-portfolios safer by preventing marginal borrowers from accessing housing finance.
In India, 'marginal borrowers' mean two very different things. One is an actual end-user, who tries to buy a house that's too expensive for him. The other kind of marginal borrower is the housing 'investor' who uses home loans to finance his investments. This creature, which didn't exist a decade ago, sees housing as a leveraged trade. Increasing the margin requirement from 5 to 20% simply means that for the same amount of cash available, this 'investor' will buy fewer houses.
However, the impact of the two requirements on genuine home buyers will be very different. The 20% is a reasonable measure for real users. Prudent lenders world-over know that the amount of down payment is the biggest indicator of whether they'll get their money back.
No one should really be buying a house if they can't cough up even 20% of its value. They should just reduce the size of the house they desire till 20% of it fits into the cash they can spare.
However, the teaser rate rule may be a step backward. For many people buying a house to live in, paying less at the beginning of their loan tenure and more a few years later is logical, since their incomes rise with time. Paying a lower EMI comes in handy in such a situation.
It's true that teaser rates create the scope for borrowers to overstretch themselves, but the cure for that is not killing a facility that was genuinely useful for so many. The cure for reckless borrowing is to stop reckless lending. There's no substitute for bankers evaluating borrowers competently and fairly and then refusing loans to those who shouldn't be getting them.
Chopping and changing the product portfolio by the RBI won't achieve that.