Mortgage Guarantee ? Showing Great Scope in the Home Finance Market
Posted by Imgc India on February 28th, 2017
With real estate properties in India experiencing a sharp hike in prices over the years, owning a house has become a far-fetched dream for many. These dreams can, however, turn into reality only if affordable home loan options are provided by banks and housing finance companies to the masses. Though lowering of interest rates has evoked optimism among homebuyers, as it improves loan eligibility and lowers EMI burden, the search for attractive schemes offering more funding and easy financing is far from over.
Keeping in mind the ongoing scenario, the call for easy financing may have to go a long way, but the need for more funding is being considered. Apart from the flexibility in LTV (loan-to-value), a commendable step has been taken in this regard which is the introduction of mortgage guarantee-backed home loan scheme.
What is a mortgage guarantee-backed home loan scheme?
Mortgage guarantee is a new concept in India. In this scheme, lenders are partly insured by the mortgage guarantee company against the failure of loan repayments by borrowers. This way not only the lenders’ credit exposure decreases, but the borrowers can also avail more relaxed credit norms like higher LTV, longer tenure and higher loan amount.
The mortgage guarantee company assures the banks against incremental risks. The banks, on the other hand, asks borrowers to pay a small fee of around 1-2 per cent of the total borrowed amount and in turn pay the mortgage guarantee company a protection fee against credit default risk. This amount offers coverage to the risk involved in the additional borrowing and therefore acts as a premium.
Advantages of mortgage guarantee for customers
The lenders with the backing of a mortgage guarantor may now offer home loans easily to the customers. For a certain fee, the customer can get a portion of the loan guaranteed, allowing him/her to buy a home at a higher LTV.
Also, if you choose to take a loan later in life, you are likely to have smaller loan tenure. Going for a prolonged tenure beyond 20-25 years under this mortgage guarantee-backed home loan scheme means you will be repaying more to the bank. This scheme is expected to substantially change the scenario for the homebuyers, increasing the availability of home loans. With higher LTV and the increased tenure, more people can realize their dreams of owning home in an accelerated timeframe.
Advantages of mortgage guarantee for lenders
This scheme aims to recover for the lender’s losses due to non-repayment by a borrower. For instance, if the borrower fails to repay the loan amounting to Rs.1 crore for which the mortgage guarantee is 30%, the guarantor will pay to the lender up to a maximum of Rs.30 lakh.
The lender will recover the dues by selling the property. In case, the selling amount of the property is more than Rs.1 crore, the lender will recover the due balance of Rs.70 lakh, pay Rs.30 lakh to the guarantor and anything excess will go to the borrower.