It’s better to have a lower home loan exposure in times of falling real estate prices.

THE softening in real estate prices, which are now down in most places by as much as 25%, has not been the best piece of news for existing home loan borrowers. This is thanks to the “depreciation of security” clause that is mentioned in home loan agreements.

Simply stated, if the value of the property — which is mortgaged as security for a home loan — falls to below the outstanding loan amount, the borrower is required to pay the difference as a one-time margin amount to the bank. The other option is to provide additional collateral for the equivalent amount. If none of this happens, the bank reserves the right to seize the flat and a borrower, in turn, becomes an unenviable defaulter irrespective of his repayment record.

Let us take the example of a person who has bought a house for Rs 50 lakh. In line with the stipulated loan-to-value ratio, the bank cannot lend more than Rs 42.5 lakh. In today’s market, the value of that property drops by, let’s say, a quarter. The value of that house consequently is now Rs 37.5 lakh. Suddenly, the borrowed amount is less than the collateral, which leaves the bank with a situation where it can ask for additional collateral. This may be in the form of gold, property or any other asset. If none of that materialises, the borrower makes the margin money payment out of his/her pocket.

The way out for the borrower, according to experts, is to have higher home equity. The clause becomes vital only if the bank has a higher equity component than the borrower.

If the borrower holds substantial home equity component through his personal funding and pays EMIs regularly, then he will not be in a tricky situation.

From the bank’s viewpoint, a borrower, who has demonstrated the ability to repay on time, is often the preferred one. Usually they make some leeway for a borrower with a good payment track record. A disciplined borrower can negotiate with the bank for more time to pay the collateral/margin money.
The collateral issue has changed substantially over the past few years. Banks typically are mandated to lend up to 85% of the property’s value to the borrower. But that has often has been breached with past instances suggesting that the number could be as high as 95%. The borrowers did not have to bring in very much and, as a result, could easily stretch their finances.

Banks undertake valuation exercises for property that is under construction. According to an official at a private sector bank, If the value (of the property) falls by 25%-30%, we revalue it, especially if we have lent up to 85% of the value. The idea is to ensure that the outstanding loan amount is lower than the property value.

Interestingly, if a borrower approaches a bank today, he will get a lower loan amount, as the bank discounts the property value. If a borrower approaches with a property value of Rs 1 crore, we evaluate it at Rs 80 lakh. This is not just in our interest but also augurs well for the borrower.

The crucial part is to ensure that the borrower does not go overboard. A borrower should not increase his or her loan exposure even if it’s a home loan. A buffer should be created by borrowing only 50%-60% of the house value.

Ahost of projects and willing lenders have made the dream of owning a house a reality for many. Apartments are equipped with unimaginable amenities and luxuries. Banks vie with one another to entice more borrowers and meet targets. The much-awaited moment that both the borrower and builder look forward to is - disbursement. But did you know that disbursement comes in different variants? Let's explore.

A home loan process is a lengthy one that starts off with filling up an application form. After a credit appraisal, scrutiny of your papers, legal formalities, technical check, valuation and collecting fees and margin money, the lender finally disburses the loan. Disbursement is payment of the loan amount by the lender to the borrower to meet his expenses.

Consider the case where the lender decides to disburse the entire amount as in the case of a fully constructed house, with no major work pending. This is called full disbursement. A loan is fully disbursed by the lender only when the builder is a reputed and respected one. Only in rare situations, will a lender fully disburse the loan amount, for a project that is in its initial stages. Otherwise, only for a ready-to-occupy house, the bank disburses the entire loan amount.

Loan disbursement largely depends on the phase of completion of a project. Be it a small house or a large apartment complex, the stages of construction are similar. After planning, drawings and approval, work on the ground commences with laying foundation walls. Then walls are raised. Roofing, plastering, woodwork, painting, electrical and plumbing jobs ensue. When a bank chooses to release the loan in various stages, it is referred to as partial disbursement. Depending on the pace and the level of progress made in the construction, money is disbursed by the lender.

For instance, when the foundation work is complete, the bank may choose to disburse 15 percent of the loan amount. The next release of say 20 percent may happen when the walls are erected. Banks make a partial disbursement for most borrowers who want to buy a house that is yet to be constructed or is under construction.

Advance disbursement is when the lender agrees to release the full amount for a house that is still under construction. This happens if the builder is a reputed one or the lender is convinced that the developer will complete the project on time. The lender can also make an advance disbursement when the borrower requests for it.

How do these variants impact the borrower? Would partial, full or advance disbursement make a difference to the borrower?

There is a larger element of risk involved in case of advance disbursements. The borrower is tied down financially to an asset that does not exist. It is very important for the borrower to read the agreement word by word before signing the deal. Most clauses are heavily tilted towards the lender. This leaves the borrower exposed to consume all sorts of risks. Starting from interest rate hikes to almost every risk is passed on to the borrower. This calls for adequate caution on the part of the borrower now rather than repenting later.

In case of partial disbursement, pre-EMI is a lower burden since it is computed on the amount disbursed at each stage rather than the full loan amount. In case of advance disbursements the EMI clock starts ticking for the entire loan amount, even before the construction is complete.

The single-most expensive purchase that most people indulge in, usually once a lifetime, is buying a house. Homeowners invest their life's savings in their home. Ever wondered what happens if a huge fire destroyed your home or an earthquake ravaged it? It's hard to imagine your hard-earned money go up in smoke. Is there any way to ensure protection of your roof and its contents? Enter property insurance.

Property insurance provides protection against most risks to property from threats such as fire, burglary and earthquake. Open perils cover all the causes of loss not specifically excluded in the policy. In other words, it is insurance coverage for all risks other than those that the policy explicitly excludes.

Common exclusions on open peril policies include damage resulting from floods, nuclear incidents and war. Named perils require the actual cause of loss to be listed in the policy of insurance to be provided. In other words, it is insurance policy that covers only losses which result from causes specifically listed in the policy. It includes damage caused by fire, lightning, or theft.

When taking a home loan, some banks offer free property insurance. However, property insurance is not a prerequisite for applying for a home loan. Property insurance isn't merely about protecting your investment in your home. It also covers your valuable personal belongings, both inside and outside your home. Property insurance will reimburse you for losses if your home or personal belongings are damaged by fire, your belongings are stolen or some catastrophe strikes.

Read the fine prints in the policy. Do not compromise on crucial elements to save a few rupees and do not pay for covers you do not require.

The householder's insurance policy is designed to cover risks and contingencies faced by householders under a single package policy. It provides protection for property and interests, as well as legal liability of the insured and his family members who permanently reside with him. Instead of taking different policies you can opt for multiple sections or covers of your choice under one policy.

Home loan insurance plans provide cover to your home loan in the event of any unforeseen calamity happening in your life. If the breadwinner is unable to earn, what happens to his EMI repayments? With home loan insurance, your family will have the support of the insurance cover to pay for the outstanding home loan, without being burdened by the loan's EMIs.

Home loan insurance provides cover on housing loans. Let's assume the breadwinner dies during the term of the policy. The cover would provide a lump sum amount equal to the outstanding amount on the home loan. As the outstanding amount on the loan decreases over time, so does the cover under the policy.