"New provision prohibits banks from raising monthly instalment even when interest rates spike"

There is good news to cheer first-time home buyers up: Nepal Rastra Bank (NRB) has restricted bank and financial institutions (BFIs) from raising the monthly repayment installment for home loans provided to such borrowers.

The maximum limit of the loan that a buyer can get to purchase a house or apartment under this category has been fixed at Rs 15 million.

Amending the ‘Unified Directives 2075’, the NRB -- the central bank -- has introduced a new provision that will prohibit BFIs from raising the monthly installment even when there is a rise in the interest rates of loans. The ‘Unified Directives’ is a collection of rules and circulars issued to the BFIs.

However, despite the prohibition to increase monthly installment amount, the duration of such loan repayment could be extended beyond the originally slated period.

“This new provision will offer a respite for the borrowers even in case of interest rate rise. There will not be an immediate pressure of paying more money in installment,” said Bhuvan Dahal, the CEO of Sanima Bank Ltd.

The central bank has also raised the loan to value (LTV) ratio -- the maximum amount of loans that a bank can float out of the total valuation of the collateral -- to 70 percent for such first-time home buyers. This means that the bank can provide loan amount up to 70 percent of the total valuation of the home to the borrower. Such limit for other residential home loans has been capped at 50 percent inside the Kathmandu Valley and 60 percent outside the valley.

However, the central bank has fixed certain criteria for loans under this new arrangement. The house or apartment, which should be inhabited only by the borrower, should be of maximum 3,000 square feet. The bank will not consider the rent earning from the house or apartment as the borrower’s income source for the loans floated under this category.

Apart from the value of the collateral, a bank takes into consideration the regular income of the borrower to ascertain the repayment capacity while floating personal loans.

To make sure that the borrower is buying home for the first time, the BFIs should make sure that the borrower has not acquired any loan to purchase or construct house or apartment from any bank or financial institution.

source: republica, 3 November 2019