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.