Banking On You: What If You Default On Your Home Loan
When you apply for a home loan, especially if you are a first-time buyer, you will have many questions in your mind on what banks can and cannot do. Will banks be able to claim your home and assets, if you default on your payment? Can banks arbitrarily raise interest rates? Can banks charge you when you switch from a fixed rate loan to a floating rate loan? And, so on.
Here is what banks and financial institutions can and cannot do:
- Even when they lower the base rate, banks can still leave the interest rates unchanged by altering the spread. If the base rate, for example, falls from 9.7 to 9.3, home loan interest rates would not fall by 40 basis points, if the spread is increased by 20 basis points. Spread is the difference between the interest rate charged and the base rate. However, for existing home loan borrowers, the spread does not change.
- You can switch between a fixed and a floating rate of interest. But, banks may charge a processing fee for that.
- Banks have the right to change the loan tenure instead of changing the equated monthly instalment (EMI) when interest rates fall.
- If you do not pay your EMI for more than 90 days, banks have the right to consider your loan a non-performing assets. However, chances of this are slim because banks are keener on interest rate payment than on claiming your assets. Banks can claim your assets only if you continuously default on the EMI payment.
- According to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, banks can claim ownership of your assets and sell it if you are a defaulter. But, banks rarely exercise this right because there prefer more acceptable ways to recover the loan amount.
- Banks are not entitled to the entire amount of money they earn from selling your house. The bank must pay you the gains from the sale proceeding, if it exceeds the money you owe the bank. But, if the money your bank earns from selling your home is lower than the money you owe the bank, you will be expected to pay .
- Banks have the right to report the fact that you have defaulted on your loan. Your credit history will suffer in such a scenario and it will be difficult for you to obtain a home loan in future.
- Even if your bank has to seize your assets, you may still be allowed to reason with bank representative to stop this from happening. You may compensate the bank through a process which is more acceptable to you.