The one-time fee varies from 1-1.8 per cent of the loan amount
Buying a house seems to be a daunting task in these pandemic times, as banks are wary of giving fresh loans. There are several limitations that are being imposed on a borrower’s eligibility that make it difficult to access the required amount of home loan. To bridge this financial gap, borrowers rely on personal and gold loans or take loan against securities, thus incurring additional interest costs. Mortgage guarantee backed home loans may give some comfort to applicants.
How does mortgage guarantee work?
Mortgage guarantee is a credit default guarantee taken by banks and housing finance companies (HFCs) to manage the credit risk in case a borrower defaults.
A bank can invoke the mortgage guarantee as soon as the contract becomes a Non-Performing Asset (NPA) as per the Reserve Bank of India (RBI) mortgage guarantee guidelines. It shall guarantee the repayment of the principal and interest outstanding in the housing loan account of the borrower, to the extent of the cover a bank takes.
For instance, if the bank has taken the mortgage guarantee for 20 per cent on your home loan of Rs 1 crore, then, in case of default, up to Rs 20 lakh loss will be borne by India Mortgage Guarantee Corporation (IMGC). The moment your loan account becomes an NPA, the bank will invoke the guarantee and IMGC will start paying the equated monthly instalments (EMIs) on your behalf to the lender.
Does this mean that if I default, I needn’t pay my loan amount?
No. You will have to repay the loan amount to the lender as and when the amount is available. As per our example, IMGC will cover your default of up to Rs 20 lakh, but you need to service your home loan EMI and repay this amount as well, with the remaining outstanding balance. If you are unable to repay the home loan and account turns NPA then your credit score will be impacted severely and the lender will auction the property to recover the losses after IMGC’s guarantee limit is exhausted. A home loan becomes an NPA when the account is 90 days past due.
How does mortgage guarantee help home buyers?
In mortgage guarantee backed home loans, your application will be processed early and on better terms. You will get the loan for higher tenures, i.e., beyond the retirement age (up to 70 years for a salaried person and up to 75 years for the non-salaried). Other sources of income are considered; for example, rental income from parent’s property, etc. “Banks take these instances into consideration and a borrower’s home loan amount increases by 20 per cent to 30 per cent,” says Sovan Mandal, Chief Business Officer of India Mortgage Guarantee Corporation.
A larger the home loan sanctioned reduces the dependence on other secondary sources of funds such as gold loans, personal loans, breaking fixed deposits, borrowing from parents, friends or relatives.
How do I apply for a mortgage guarantee backed home loan?
In case you apply for a home loan with one of the banking partners of IMGC, the bank’s representative will recommend applying for a mortgage guarantee backed home loan scheme.
Do all banks and HFCs offer this loan?
Not all banks or HFCs offering this mortgage-guaranteed home loan. You need to apply from banks that have tied up with IMGC. State Bank of India (SBI), Axis Bank, ICICI Bank, Bank of Baroda, LIC Housing Finance, Tata Capital, Shriram Housing Finance among others have partnered with IMGC.
How much is the additional cost added to the EMI after opting for a mortgage guarantee scheme?
That depends on various parameters such as credit profile of the borrower, loan-to-value ratio, down payment, credit score and extent of guarantee coverage. For instance, the one-time fee varies from 1 per cent to 1.8 per cent. On an average, the EMI, for a customer, goes up by Rs 15 for every Rs 1 lakh of home loan on account of mortgage guarantee fee. So, for a Rs 50 lakh home loan, the mortgage guarantee fee will be Rs 750 every month.
Do I need to provide additional documents for taking the mortgage guarantee scheme?
No additional documents are required, except the usual ones required for a home loan application.
Are mortgage guarantee and mortgage-linked life insurance the same?
Mortgage guarantee is not mortgage-linked life insurance, which pays off the mortgage if the borrower dies or becomes disabled. Mortgage guarantee is a credit risk mitigant and pays the EMI on your behalf to the lender if you default. Mortgage-linked life insurance, on the other hand, kicks in if the borrower dies, so that the burden of paying the EMIs does not fall on the borrower’s family.