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Friday, October 31, 2008

Be ready to pay as much as 40% own contribution upfront if you are planning to buy a home on a bank loan

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Banks have started increasing the margin money for home loans following the downturn in realty markets.

Banks now want to ensure that even in the case of a sharp decline in prices and a default by the borrower, it should be able to recover the loan amount.

It's tougher buying a home now:

Margin money is the percentage of purchase price (own contribution) that the buyer has to bring. The balance is provided by the bank.However, the call for higher margins is likely to further depress the demand for residential property, at a time when high interest rates have already made house purchases expensive.

Many banks have already increased margin money by 5-25 percentage points depending on the amount borrowed. Country’s largest lender, State Bank of India (SBI), for instance, now prescribes a margin money of 25% for loans up to Rs 30 lakh, compared with 20% earlier. For loans up to Rs 1 crore, SBI has increased margin money requirement to 30% from 20%, and for loans above that, to 40% from 25%.

“We have increased the margin requirement in order to secure our advances from any price fluctuation in the market. Also, the requirement of higher margin money would ensure that only reasonably sound and credit-worthy borrowers are provided advances. This in turn would help keep the risk lower,” an SBI official said.

The new SBI rates are effective from October 10. At least two other large public sector banks have also increased the margin money requirement by 5-10 percentage points, while others are likely to follow suit. Officials of these banks were unavailable for comment.

Large private sector banks such as HDFC Bank and ICICI Bank have, however, not increased the margin money. Though they have tightened the prudential norms for giving loans and deciding the creditworthiness of borrowers.

“We have not made any changes in the margin money requirement for home loans as we have been fairly prudent in our lending process,” an ICICI Bank official said. HDFC Bank officials said that there was no urgency to increase the margin money as most of the home loans in the past one year averaged around 65% of the property cost.

Moreover, the bank is taking stringent measures to ensure that only borrowers with sound repayment capacity are extended the advances.

The tightening of loan mechanism and higher margin requirement come at a time when the real estate sector is facing a severe demand crisis. Earlier, buyers could borrow almost the entire sale consideration, up to 85% of the price in loan and the balance for furnishing the house.

The buyers will now have to pay up to 40% of the price from their own pocket. This is sure to make home buying difficult.
-The Economic Times

Related Stories:

1) Can our banks weather the financial crisis? - PSM Rao

2) Vijaya Bank moves to control home loan defaults

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  1. Be ready for 40% reduction (sudden reduction) in Property Prices across Pune.

    The expert will still call it a Correction, just like they were in February when stock market crashed by 2000 points.

  2. If you pay 40% as own contribution and you get the possession after two or three years, just calculate how much of money in interest you will lose. Even if the rate of interest on housing loans falls, you will pay much more than what you would have been paying earlier. And in case of default, your bank will just sell off at whatever cost, just a little above 40% to recover its dues. So if the US economy does not come back to full gear in the next six months, expect property prices going down by at least 40 percent.

  3. @sanajy:
    I could not understand the calculation. Let me try to calculate: Earlier you were paying 15% by your own. Now, lets assume you will pay 40% (Though this is not valid for all slabs of loans).
    Now, its only the margin money that is changed. The payment structure to builders is not changed. Builder will not take whole of 40% from you while booking the home/flat. He/She will take it as the construction work progresses. So, the amount of payment to builders is same. Hence, you need not pay 40% at the start. So, don't loose any interest on that.

    Other thing, as home loan interest rates are currently higher, so taking lesser home loan will actually benifit , if you have money.

    @atul : Buying capacity of people will reduce, but not by 40% as atul said. The straight calculation for that, is many of Indians are having margin aroung 20-30%. Infact as HDFC spokeperson said on average the give load of 65%. So, not much excitement in reduction in prizes (because of this margine increase). Though, there are other factors which can help in reducing prizes, and we are seeing it happening.

    One small issue, the increase in margine will have some effect on tax payers. The benifit of tax deduction on interest of home loan will reduce, as people will borrow lesser loan.

  4. I really not understand the bank's decision. First they cut the loans to Builder, now they cutting down on buyer ? Looks like they wan't to close down real estate business.

    Or the worst case is govt. will nationalize all real estate companies, so all houses will be at subsidize rate.