Home loans have an important factor called loan to value. Banks lend up to 75% to 80% of the value of the property.
Recently, we received an enquiry from an applicant who wanted to switch his home loan from a lender who was not reducing the interest rates to one who was offering cheaper loans. Though this seems a business opportunity for any mortgage broker, beware of the circumstances in the valuation market in India right now.
This gentleman with a fat pay cheque owns a property in Mumbai. The property is sold by one of the topmost developers in Mumbai. Banks simply refused to refinance his loan outstanding. The reason cited was low property valuation today. Most lenders are citing up to 20 to 25 percent lower property valuation as compared to a year ago. The bankers are quick to point out that the builder himself is selling at much lower price than the price he sold in CY2015.
For the beginners, home loans have an important factor called loan to value. Banks lend up to 75 percent (for more than Rs 75 lakh of loan amount) to 80 percent (for less than Rs 75 lakh of loan amount) of the value of the property. This should be best understood with an example. Say you have bought a property at Rs 2 crore. And the registration happened at that price two years ago. You funded that property with 75 percent loan – which translates into a home loan of Rs 1.5 crore. Now after two years, the lenders value that home at Rs 1.5 crore due to 25 percent correction in home prices. If you try to refinance your home loan, the maximum loan you will get at 75 percent loan to value ratio is Rs 1.125 crore.
This may be a shock for many home-owners, but it has transpired within six months of demonetization. It is a situation that is caused due to changing dynamics of the real estate sector, for both residential and commercial segment.
A property developer recently said, "We are offering best rates possible, just to make the stock move. We have lakhs of square feet of space - ready (100 percent with OC), almost ready (80 percent+) and sitting on land bank. What do we do holding onto the price? The extreme times need extreme measures."
Of course, but it is affecting the cost of the properties of those developers too who are willing to hold on. The larger brands seem to be more keen in 'letting go' than the B or C category players who always had lesser margins. Not getting into whether it is right or not, it is only fair to each one weighing their options and position.
Interestingly, banks, especially the multinational ones, are getting the brunt of it. They generally engage prime valuation firms with reputable background. Some of these valuation companies are multinational, too, and hence their approach matched. These high-end valuers are sending reports of very low valuation following these discounting strategies of developers. As a result, banks are unable to do business which was always a piece of cake for them earlier. Without naming any lenders, this is a general 'known secret' among the sales team of theirs and to avoid an irate client later, they are refusing business at the inception itself, resulting into low volume disbursal.
Relief is private lenders are closer to the ground reality and able to glide through this wave by bringing in documents of the recent sales (sale agreement), showing that the list price hasn't really gone down.
By virtue of doing more number of loans in a single property, these lenders always are in the possession of a current deal of another borrower which helps them take a call above the valuation report they receive from their outsourced partners.
Now, coming to the ready resale transactions and their valuations, it is actually worse. There is no ready reference of price that has been paid recently, as most of them had a cash component not reflecting in any papers. Let’s understand this with an example. In a transaction the price paid was Rs 2 crore and Rs 1.50 crore was the value it was registered at. Now after a couple of years, valuers do not hesitate to bring it down to Rs 1.25 crore given the perception of a market wide correction in the price.
There has been instances wherein, though the buyer is registering the house at Rs 2 crore (since paying fully by bank transaction now), paying full stamp duty charges, the bank stands with a valuation of Rs 1.25 crore in hand. The home loan applications of such borrowers are moving from one lender to the other. After multiple trials, the borrower is forced to choose the best he gets. His self-contribution towards the property is sometime hitting 50 percent of the buying cost.
Loan Against Property (LAP) is a cash-out loan for these difficult times and proven helpful for many businessmen as well as salaried individuals. Banks fund 55-60 percent of the market value of the immovable asset. LAPs, too, are subject to loan to value ratio and suffer from the same phenomenon of falling valuations. The property is priced lower than it used to be, just a year ago, resulting in lesser funding. All lenders love this product due to high margin, but the competition is steeper now as the borrower is no more looking at a cheap interest rate, but at a higher loan amount.
Under the above circumstances, many sale transactions are getting cancelled and banks have to let go of their business more often than earlier. Even old clients with great profile, fat pay package, wealth relationship, super credit score is of no use now.
Ultimately, the focus of home loan has boiled down to the more important word- HOME. Loan is secondary. Should this condition prevail for another year or so, banks will be losing front-line sales managers (their most earning is through incentives and not doing volume-business is getting hit below the belt for them), and that may result in some lenders packing their mortgage portfolio or getting into a completely different strategy for survival.
While the banks may find their way out, if you are keen to buy your dream home, be careful. It is not only your profile as a borrower that matters but also the property you are looking at. Be sure about the valuation element and do not blindly offer token money to sellers looking at historical prices. You may be in for an odd shock. Though the rates are low and property prices are falling, do not test the depth of the waters with both feet.
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