This Is What Happens When The Market Value Of A Property Falls
Property prices have been falling for some time now, and developers are finally waking up to the fact a boom is not lurking around the corner. Developers are offering attractive deals to home buyers, with lower prices and freebies. The Real Estate (Regulation and Development) Act came into force on May 1, to ensure that flats are delivered to home buyers on time.
So, is this the right time to get off the fence and buy your home, or should you wait longer to see if there is another correction around the corner? Well, we cannot predict the future. This article is for people who have decided to buy.
MakaaniQ tells you how changes in the market value of the property will affect your cost of credit.
If you are on the verge of a bank-facilitated purchase, consider the following Scenarios:
Scenario 1: Property prices remain stagnant
- In this case, the interest payment is the only extra cost you bear.
- Market stagnation is correlated with inventory overload. This is the case in the current market, and this takes some time to clear.
Scenario 2: Market prices slide further, and prices depreciate 5-10 per cent further
- Things get a little tough now. Not only do you pay home loan Equated Monthly Instalments (EMIs) on the high price you paid for the property, but you also bear the cost of interest on this amount.
- This will give you a depreciated return, and an additional burden of interest cost to recover
Scenario 3: The market goes through a second correction, and prices depreciate 15-20 per cent further
- Things get really tricky now. No lender ever funds 100 per cent of the market value of the property. Loans are granted only up to a certain percentage of the property's value. If the loan amount is more than Rs 30 lakh, banks safeguard themselves by lowering exposure to only 60-80 per cent of the property value.
- This means that the bank keeps the property as security and finances your home loan only up to a certain percentage of the value of the property, which is up to 80 per cent in most cases.
- If the borrower defaults on the repayment, the bank recovers the money it lent by selling off the house. It is assumed that the market value of the property would be greater than or equal to the loan amount due.
- You often do not notice when you sign the home loan agreement that you give the bank the authority to confiscate the property if you default on the repayment. You are also likely to forget that there is a 'depreciation of security' clause in the banks' home loan agreement.
- Let us understand the 'deprecation of security' clause with an example. Mr. A purchases a flat for Rs 50 lakhs. Then the bank will sanction a maximum loan of Rs 40 lakh (i.e. not more than 80 per cent). If value of the flat decreases by 25 per cent to Rs 37.50 lakh, the borrowed sum will be more than the security given to the bank.
- Since the bank can only expose itself to 80 per cent of the property value (80 per cent of Rs 37.50 lakh = Rs 30 lakh), the bank may direct you to make a one-time margin money payment of Rs 10 Lakhs (old margin minus the new margin, or Rs 40 lakh minus Rs 30 lakh).
- The lender can also ask you to provide another security to cover Rs 10 lakh. If you are unable to provide such security, the bank may confiscate your property.
For those applying for a home loan, here are some dos and don'ts.