A bank provides a loan up to a certain percentage of the property's value. "If the loan amount is below Rs 10 lakh, banks can offer as high as Rs 8.5 lakh (85% of the property value), which includes the stamp duty and registration amount. However, as the loan amount increases, the banks reduce the exposure to 75-80%," says a senior general manager of the Bank of India.
In other words, a bank keeps the house as security and maintains a certain level of exposure to the value of the property, usually 75-85%. If the borrower defaults on the loan, the bank can recover the money by selling the house. For this to happen, the market value of the flat should be greater than or equal to the home loan that is outstanding.
If the market value is less, the bank will ask the borrower to provide additional collateral or pay the difference immediately. If he is unable to do so, the borrower will be termed a defaulter and the bank will seize the property, and if required, sell it.
Not many people realize but while signing the loan agreement they empower the bank to take over the property in case of a default. "Most borrowers are unaware of the 'depreciation of security' clause in the banks' home loan agreement. This is one of the nearly 15 clauses stating the action that the bank will take in case of a default," says Ramesh Bhojwani, a Mumbai-based financial planner.
Suppose, you buy a flat for Rs 1 crore. If the bank's exposure to the value of the house is 80%, it will provide a maximum loan of Rs 80 lakh. If the value of the house drops by 25% to Rs 75 lakh, the borrowed amount will be more than the collateral provided.
As the bank needs to keep a maximum exposure of 80% on the property value (80% x Rs 75 lakh = Rs 60 lakh), it may ask you to make a one-time margin money payment of Rs 20 lakh (old margin minus the new margin, or Rs 80 lakh-Rs 60 lakh).
Alternatively, it can ask you to provide an additional collateral of Rs 20 lakh. If you are unable to pay this, the bank could seize the house. "Even if the customer has a good repayment record, the bank will treat him as a defaulter and seize the property to recover its dues," says Bhojwani
The additional collateral that a bank asks for can be any investment, such as gold, another property, shares or bonds. However, avoid using stocks or mutual funds, especially when the markets are volatile. This is because the stock prices could drop steeply and the bank will ask you to provide more investment to cover the difference between the value of the original pledged portfolio and the current one.
It may even sell your shares. Also, most banks will only sanction up to 60% of the current value of securities. This is the reason bankers advise debt instruments as collateral as these are less volatile. Banks also consider up to 85% of the value of investments in National Savings Certificates, Kisan Vikas Patras, Indira Vikas Patras and life insurance.
When the bank evaluates the borrower's property, it comes up with three values. The first is the price that the builder is demanding for the property, the second is the value of a similar property in the same locality, and the third is the distress value.
"The distress value is the price that the house would fetch immediately. So, if the property is valued at Rs 1 crore, its distress value could be Rs 80 lakh. The bank will give an amount less than the distress value
No comments:
Post a Comment