Must read For Each New Home Loan Seeker

It has not happened yet but if home prices fall steeply, banks can seize your flat. Recent study shows that there has been a decline of 15-20% in house prices in some pockets of Mumbai. This may make you wonder what relation does Mumbai have in all of this? Directly nothing but the reduction in property prices has made the housing finance companies sit up and take notice. All the home loan lenders have a clause – “Depreciation of Security” (among one of the 15 or so clauses which states that ‘event of default’) in the mortgage agreement which gives them the power to confiscate the property or ask for extra collateral in case of sharp fall in house price. If you are unable to do so, you can be termed as a defaulter thus giving bank the right to seize and even sell the house bought on loans.

Usually a default happens when a home loan borrower is unable to pay his EMIs on time but there is more to ‘default’ than just this.

To quote – “Depreciation of Security” clause says, “If any property on which the security for the loan is created depreciates in value to such an extent that, in the opinion of the bank, further security should be given and such security is not given….” – This means that a bank sanctions a home loan against the house as security so if the borrower defaults bank can recover by selling the property. But for this to happen, at any time, the market value of the said property should be greater or equal to the outstanding home loan.

Banks usually ask for additional security or collateral from the borrower and if he/she fails to do so, term him/her as a defaulter. A defaulter’s loan outstanding becomes due and immediately payable; bank can take possession of the property and thus can sell it to recover the balance.

In the past few years’ property prices have been soaring so this clause has actually never been invoked but in future, especially for those who have purchased when the prices were at their peak may have to keep an eye out.

Let us get a clearer picture with the help of an example. An individual bought a flat worth Rs.35 lakh, takes a home loan of Rs.30 lakh and rest Rs.5 lakh from his own sources. Bank by insisting on the borrower contributing Rs.5 lakh, has built some margin of safety. After buying the flat, if the market price falls by more than 20% and goes below Rs.30 lakh, the bank can insist on some extra collateral (like gold, other property, etc.), from the borrower, and if he/she fails to do so, the bank can label him a defaulter and seize the flat.

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