What happens if the value of your house falls

Property | admin | September 24, 2011 at 5:40 am

While reports of a possible fall in property prices by 10-15% in metro cities such as Mumbai and Delhi are sure to cheer up potential buyers, these could spell bad news for the recent home loan borrowers.

This is because the value of property for which they have taken the loan will also come down, perhaps falling below the outstanding loan amount. As the bank is unlikely to risk more money than the worth of the house, it will ask the borrower to pay the difference.

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 realise 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.

Source: Economic Times