Property prices have become stagnant from some time and the builders/ developers are finally waking up to the fact that the price boom is not lurking around the corner. To sell their build up properties they are offering attractive deals to upcoming home buyers, with lower prices and attractive freebies. The Real Estate (Regulation and Development) Act came into force on May 1st to ensure that the properties should be delivered to home buyers on time.
So, when there is so much of hustle and bustle, is it a right time to get off the fence and take a strong move to own your home, or should you wait longer to see if there is another correction coming up around the corner? Well, no one can predict the future but this article is for those buyers who have decided to buy.
Mr. Somvendra Kelva, Director Mudrahome, has come up with few guiding tips that will help you to understand how changes in the market value of the property can affect your cost of credit.
After finalizing the property when you go to the bank to apply for the loan and with a positive note when everything goes in the right direction then you are ready to buy a bank-facilitated purchase, you need to consider the following Scenarios:
Scenario 1: Stagnant Property prices
- In this case, the interest paid by you towards the loan is the only extra cost you bear.
- The overload of any inventory is completely correlated with the stagnation of the market. This can be a scenario which you have to face in the current market situation and it will take some more time to get cleared.
Scenario 2: Depreciation in the Market prices (5%-10%)
- In such scenarios things become little tough to understand. You not only have to pay the home loan Equated Monthly Installments (EMIs) on the higher price of the property, but also you have to bear the cost of interest on the same.
- This higher loan cost will give you a depreciated return on your property and an additional burden of interest cost paid towards the loan.
Scenario 3: The market price again goes through a second correction and prices get depreciated with 15-20%
- The situation has become really tricky now because it is difficult whether to invest or not. In such scenarios no lender funds a 100% of the market value of the property and loans are granted only up to a certain percentage of the present market value of the property. If the loan amount exceeds from ₹30 lakh then Banks/ NBFC’s safeguard themselves by lowering loan amount exposure to only 60-80% of the property value.
- The above statement means that the Bank/ NBFC will keep your property as a security and then finances your home up to a certain percentage of the market value of the property, which is up to 80% in most of the cases.
- Due to any uncertain reasons if the borrower is unable to repay the loan or becomes a non-profitable account (NPA) then the bank or any other lender has the complete right to recover the money by selling off the property. While processing the loan the situation is assessed and it is assumed that the market value of the property will be higher or equal from the due loan amount.
- Many borrowers do not notice before signing the home loan agreement that you authorize the Bank/ NBFC to seize the property in case of the non repayment of the loan amount. You may also forget the clause of ‘depreciation of security‘ in the final home loan agreement given by the lender.
- But what exactly is the clause known as the ‘depreciation of security’. Let’s understand this clause with an example. Suppose Mr. X purchases a residential property for ₹80 lakhs. Then the bank will sanction a maximum loan of ₹64 lakh (i.e. not more than 80 per cent). If value of the flat decreases by 30 per cent than the property cost will be ₹56 Lakhs. The above example clearly shows that the borrowed loan amount will be more than the market value of the security or the collateral kept with the bank or lender.
- Since the bank, due to the current market status, can only expose itself to 80 per cent of the property value (80 per cent of ₹80 lakh = ₹64 lakh), the bank may ask you to make a one-time margin money payment of ₹8 Lakhs (old margin minus the new margin, or ₹64 lakh minus ₹56 lakh) to reduce the risk.
- The lender can ask you to provide another property as collateral to cover ₹8 lakh. If in case you are unable to provide such security to your lender the bank/ NBFC may confiscate your property.
However, the situations arise in very rare rest of cases but still one should be careful before joining the agreement and also before finalizing the properties. The Bank/ NBFC’s review the properties after every 3 years to assess the current price of the property.