In case of fall in home prices banks can seize your house

Most of the lender banks have hiked the lending rates but have left home loan untouched. Recently, the chairman of a major housing finance company found that house prices have declined by 15-20% in some pockets. This is good news for aspirant home buyers. But if you have taken loan then it is not good because the value of your investment is going down. There is more important for this although you have been constantly paying your EMIs your house is potentially under threat. Get the latest updated home loan rates here and also some facts to get approved for the loan fast.

All the home loan lenders are adding a clause in the mortgage agreement which gives them the power to seize the property or ask you to bring in extra collateral if house prices are falling dramatically. In case you are not able to do so, the bank might term you as defaulter, giving the bank the right to seize and sell the flat or house bought on the home loan.

Trouble comes from an inoffensive sounding "Depreciation of Security" clause, one of the 15-and-odd clauses that constitute an "event of default" in case of a home loan.

Usually, a default is when the borrower of the home loan cannot carry on paying the equated monthly installments (EMIs) to repay the loan. This is because the definition of default on a home loan is a bit more complicated than that.

According to "Depreciation of Security" clause: "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".

What does this legally mean? Bank gives a home loan against the house as security. In case the borrower is unable to repay back the loan, the bank can recover the loan by simply selling the flat or house. In such case the market value of the flat at any point of time should be greater than or equal to the home loan that is still outstanding.

To protect itself, the bank can ask for some extra security or collateral and if the borrower fails to do so, the bank can term him a defaulter. Then the loan outstanding becomes due and immediately payable and the bank has the right to take possession of the house or flat and sell it to recover the balance.

Let us try and understand this through the example of an individual who bought a flat worth Rs 25 lakh. The bank gives him a home loan of Rs 20 lakh and he puts in the remaining Rs 5 lakh from his own sources.

By insisting on the borrower contributing Rs 5 lakh, the bank builds in some margin of safety. After buying the flat, if the market price falls by more than 20% and goes below Rs 20 lakh, the bank can insist on some extra collateral like gold, other property, etc., from the borrower. If the borrower does not come up with this extra collateral, the bank can label him a defaulter and seize the flat.

Kamlesh Rao, vice-president and business head of personal finance at Kotak Mahindra Bank said that this clause have not been invoked till date. He added, "Typically, in case of a home loan, additional collateral may not be asked for. I haven't heard of any such instances". "If property prices fall further there will be an issue under home loans. But that is the risk of the business," he stated.

Sujan Sinha, senior vice-president, retails assets, of Axis Bank says: "Prices have not cooled off. But the worry remains if property prices correct. Right now we have not asked for any additional collateral, but if prices fall below the loan outstanding then it becomes an unsecured loan and additional collateral may be asked for." Some bankers claim that even if property prices are correct there is the margin and the cash component, or the 'black' component, which acts as a cushion against a fall in the value of the house.

According to banker’s retail home loan borrowers are relatively on safer side, the same cannot be said for corporate borrowers who have used property as collateral. "It may happen in the case of working capital loans, bank lines of credit or loan against property where the value of the collateral is specified during the sanction of the loan.

In such instances, if the value of the security goes down, then the borrower may have to provide additional collateral," says Rao of Kotak.

Tata Capital to venture in home loan business by 2009

Tata Capital Limited a wholly-owned subsidiary of Tata Sons Limited will soon be entering into the thriving home loan business by March 2009. This was disclosed by its Managing Director and CEO, Mr Praveen P Kadle. He said, “Although we will be a late entrant in this market, we see good business opportunities in offering home loans. We hope to start this by March next year”.

Tata Capital, is a non-banking finance company, started its operations in 2007. With this Tata Group made entry into a host of new financial services. Currently, the company has a capital of about Rs 2,000 crore and is offering suite of products across multiple financial domains—personal loans, car loans, distribution and broking, wealth management, SME Finance, capital markets, private equity and infrastructure finance.

Mr Kadle also informed by end-September Tata Capital will be launching its first private equity fund which will be targeting on opportunities in mid-sized companies. He added the size of the fund is yet to be finalized, there are indications that the initially fund size may be around $ 250 million. Company is also planning to launch a venture capital fund focusing on the technology space (information technology/telecom).

At present Tata Capital balance sheet is around Rs 4,000 crore. On being enquired whether the company will be looking at inorganic growth, Mr Kadle said that most of the opportunities here were expensive. He said, “Indian valuations are expensive. Inorganic growth may not be attractive, but that does not mean we will not look at inorganic growth”.

Moreover, Tata Capital will soon be venturing into insurance broking. “A subsidiary of Tata Motors has got license for insurance broking from IRDA. This company would eventually come under Tata Capital. We will also get into commodities broking soon”, Mr Kadle said.

On being enquired whether Tata Capital is consider listing of its shares in the coming months, Mr Kadle inforemed that the company was not looking at listing now.

Reliance Capital hiked home loan rate after RBI

Reliance Capital, Anil Ambani-led Company offers property loans. Following on lines of large banks like PNB, ICICI Bank and Axis Bank Reliance Captial has also increased its lending rates on property loans by 0.50 per cent to 14.25 per cent with effect from August 1.

As per public announcement made by the firm sources stated, "Reliance Capital announces a 50 basis point increase in the lending rates for its entire floating rate linked products-- Mortgage and SME Loans".

The announcement stated loans taken on fixed interest rates will not be affected by the PLR hike. Only the loans taken on floating rates have been revised. Earlier to the increase, the prime lending rate of RCL was at 13.75 per cent.

Reliance consumer finance, an ADA Group firm, as on June 30 had a loan book size at Rs 8,094 crore, also provides personal loans, vehicle loans (car and commercial), home loans, loan against property and SME loans.

Reliance Consumer Finance produced revenues of Rs 262 crore in the June quarter, against Rs 7 crore in the corresponding period a year ago.

The company has hiked rates a week after the Reserve Bank hiked the mandatory cash deposit by banks by 0.25 per cent and short-term lending rate to banks or repo rate by 0.50 per cent.

After RBI’s decision most of the private and public sector lenders have revised PLR and deposit rates upward. Country's second largest public sector lender, Punjab National Bank, increased its prime lending rate to 14 per cent.