The Most Authentic Guide on Personal Finance and Investments


Words of Wisdom : "Try to be a rainbow in someone's cloud." ~ Maya Angelou

Can't afford full down payment? Try Mortgage Guarantee.

As you know, to buy a house you have to chip in 20-25% of the cost. And, banks will finance the balance 75-80%.

But, given the high property prices, even the down payment runs into many lakhs of rupees. This is beyond the reach of many pockets.

Worry not! You now have a remedy... Mortgage Guarantee.

a. Normal Home Loan

Suppose, the property you desire, costs Rs.60 lakhs.

As per RBI regulations, banks can lend you maximum only up to 80% i.e. Rs.48 lakhs. The balance amount of Rs.12 lakhs has to be brought in by you. 

Unfortunately, you don't have sufficient money to make the required down payment.

Net result:

You can't buy your dream home.

mortgage-guarantee-cuts-down-payment
With mortgage guarantee, your endless wait for a dream home may soon be over.


b. Mortgage Guaranteed Home Loan

This is where mortgage guarantee comes to your rescue.

With a mortgage guarantee, banks can lend you higher amounts than what is stipulated by the RBI. You can now get even up to 90% financing.

So, taking the above example...
... your contribution as down payment would be 10% i.e. Rs.6 lakhs only, as against Rs.12 lakhs earlier. In short, your down payment liability reduces by 50%.
... banks will lend you the balance Rs.54 lakhs.

This, of course, is subject to the condition that you have adequate capacity to pay the higher EMIs.

Earlier, for Rs.48 lakhs loan, your EMI payout would work out to Rs.46,321 (assuming a 20-year loan at 10% p.a. interest rate). The revised loan amount of Rs.54 lakhs, would push up your EMI burden by about Rs.5,800 to Rs.52,111. If you can comfortably meet this higher monthly liability, banks would willingly give you Rs.54 lakhs as loan.

Alternatively, banks could increase the loan tenure, so that the increase in your EMI payout is limited. For example, instead of 20 years, a 25-year loan of Rs.54 lakhs would cost you Rs.49,070 per month. 


c. How does mortgage guarantee reduce your down payment?

It is a simple question of RISK... for the bank.

Earlier, the bank was taking the entire risk on you. So its prudential lending capacity, as prescribed by RBI, was restricted to 80% of the property value.

Under the new structure, suppose a mortgage guarantee company agrees to bear the risk for 1/3rd of the loan amount. The balance 2/3rd loan risk, remains with the bank.

In other words, if now you default, your bank will get Rs.18 lakhs (1/3rd of Rs.54 lakhs) from the mortgage guarantee company. And, it has to recover only Rs.36 lakhs from you. This is well below the Rs.48 lakhs (80%) stipulated by RBI.

Hence, as the risk gets shared, banks can afford to lend you Rs.54 lakhs, .

Since we are talking about the risk of the bank, arranging mortgage guarantee for your loan, is primarily the bank's outlook. You don't have to separately do anything for it. Of course, since you are an interested party, the entire structuring would be done with your concurrence only.


d. Mortgage guarantee is a type of insurance

As you would have rightly guessed, mortgage guarantee is nothing but a type of insurance.

It insures the bank against any default in the loan repayment by you.

Hence, as with any other type of insurance, you have to pay premium to the mortgage guarantee company. The premium amount would depend on various factors, such as 
- how much down payment you are willing to bring in; 
- the total risk that the mortgage guarantee company would have to bear; 
- your credit worthiness as determined by your Credit Score.


e. Mortgage guarantee differs from other types of insurance

It is different from the typical home loan insurance, which provides cover for the risk of life of the borrower. The insurance company pays the lender the balance loan outstanding, only in case of death or disability of the insured.

It is also different from home insurance, which protects your house and its contents against the risk of theft, fire, floods etc.

Mortgage guarantee is protection for the lender, against the risk of normal default by the borrower.


So now you know how mortgage guarantee helps people, with insufficient money for down payment, to acquire a house... sooner than later.

It is a new concept in India. Hence, at present, you may not find too many lenders offering mortgaged guaranteed loans. But, I am sure, it would soon become quite common and popular.

Your endless wait, for a dream home, is coming to an end.

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