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Rate hikes trigger home loan defaults


Rate hikes trigger home loan defaults

Last updated: May 8 2007
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  • Rate hikes trigger home loan defaults

    Housing loan defaults were rising,this is because many borrowers, who buy houses as an investment, have started defaulting following the hikes in interest rates.

    Mortgage default is rising for the category which borrows to fund a second home or buys property as an investment,” said U.S. Bhargava, chief general manager, Punjab National Bank.

    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.

    “Banks are also planning to charge higher interest rates on loans for a second house to discourage non-serious borrowers as well as home price arbitrage seekers,” said Bhargava. At present, banks do not have appropriate know-your-customer norms to segregate those who are borrowing for the first and second 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,”.
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