Defaults On Loan Against Property Set To Rise, Here's What Borrowers Can Do

Earlier this month, rating agency CRISIL warned home finance companies (HFCs) and non-banking finance companies (NBFCs) that their profit margins will be substantially hurt by a rise in delinquencies in the loan against property (LAP) market. The agency says the delinquency rate in this segment is likely to rise 70 basis points to 3.3 per cent this financial year. Delinquencies in the LAP market are set to rise even as underlying risks stemming from moderating growth, intensifying competition and falling yields come to the fore, Crisil has said.

“While large HFCs and a few NBFCs with robust diligence ecosystems managed their portfolios well, some others have reported over 100 bps increase. We believe systemic delinquencies will rise further as LAP portfolios season," Crisil said.

This is in contrast with a prediction made on home loans by another global rating agency, Moody's.

In the residential mortgage-backed securities sector, Moody's expects delinquencies to remain around low levels of one per cent in 2018, with stable interest rates and home prices supporting performance. The majority of mortgage borrowers in the country are salaried employees with steady earnings and mainly use these loans to buy properties for self-occupation, which signifies that such borrowers have a good credit profile, it said.

It would be appropriate to mention here that LAP is a facility provided by banks to leverage your immovable asset. If you want to expand your business, or are in dire need of money owing to a personal emergency, you can take a loan by mortgaging your property to arrange funds. LAP is considered a better way to raise money when compared to unsecured loans such as personal loan since rates are lower—in the range of 9-12 per cent and the repayment tenure is higher. On the downside, the lender will have the right to sell off the property and make up for his losses in case of any failure on your part to re-pay your monetary obligation. Getting a loan in future would become equally difficult as your credit score will have to bear the brunt of the default.

Here are a few things we may like to point out in case you are planning to take a loan against your property:

*First of all, taking a loan against property for unproductive reasons – for an expensive wedding or for a foreign tour– would be a bad idea. The loan must be taken with the singular aim of multiplying it.

*The magic of negotiation is simply priceless. You know if you are able to convince the lender of your bright prospects, you would be able to get a higher amount as loan than you are eligible for. This is certainly not a good idea, its short-term benefits notwithstanding. Take only as much as you can easily repay.

*Don't excessively depend on external sources to pay your monthly EMIs there is only so much control that you have on such factors. You need to have an internal back-up to save the day in case things go pear-shaped in future. It is only after factoring that in that you should look for LAP.

*Pre-pay the loan if you can. The availability of long-term repayment should not stop you from doing so. Most borrowers pre-pay the loan in three-to-four years.

*Go for LAP only if you are sure that you are financially capable of freeing your property from the chains of mortgage, if need be.

That brings us to the point, what if you are one of those who are adding to the rising delinquency rate in the LAP segment? What should you be doing in case you have taken a loan against your property and are not able to fulfill your obligation? This could be a likely scenario if you are running your own business and are facing the heat owing to the recent changes at the policy front. A slowdown in the property market may also mar your chances of having a regular tenant who would be helping you pay the monthly equated monthly installments (EMI).

The best thing would be to inform your lender about your situation immediately. This gives you two advantages. First, the lender would know you are being honest about the matter and will be willing to negotiate the terms of the deal. It may, for instance, extend the loan tenure to your monthly burden.

If problems still persist and the bank goes for an auction of your property, keep track of the entire process. Make sure you get the benefit if the property fetches more than what you owe to the bank.