Buying a home is often a once-in-a-lifetime activity for many people, and so they want to purchase the best one they can afford. However, this could lead to stretching the budget and borrowing the maximum amount one can get as a home loan.
Sometimes lenders offer borrowers a much lower home loan amount than what has been applied for. People who face such a roadblock may end up dropping plans to buy their dream home or go for a costly loan to make the purchase.
But what if we told you that you can get a higher amount as home loan than what the bank is ready to give and that too without making a big dent in your pocket? Read on to find out how and who can get this loan and how much it will cost you.
Which borrowers get a higher home loan
While banks are liberal in offering a higher home loan to a salaried person working with a reputed organisation, the road is not that smooth for people who are non-salaried, self-employed, new to credit or looking to buy an unapproved property. These people often face difficulties in getting approval for the home loan amount they want.
This is where a default guarantee cover from India Mortgage Guarantee Corporation (IMGC) can help.
“IMGC provides mortgage guarantees which enable borrowers with insufficient credit history or lower credit scores to obtain home loans. This is particularly beneficial for first-time home buyers, young professionals, and self-employed individuals who might not meet traditional loan eligibility criteria due to variable income patterns or lack of credit records,” says Adhil Shetty, CEO, Bankbazaar.com.
Sometimes, the loan amount requested can go beyond the standard limit offered by the lender. “IMGC-facilitated loans are useful for those seeking a loan amount that exceeds the lender’s standard lending limits. For instance, if the loan-to-value (LTV) ratio required is higher than what the bank typically offers, an IMGC guarantee can bridge the gap, allowing the borrower to secure necessary financing,” adds Shetty.
Homebuyers are sometimes offered a lower home loan amount not due to their profile but due to perceived risk in the property. “Individuals looking to buy a property in less conventional or underdeveloped areas, where banks might hesitate to lend due to higher perceived risks, can also benefit from an IMGC-facilitated loan,” says Shetty.
How big a loan can you get with IMGC cover?
This cover works within the Reserve Bank of India (RBI)’s regulatory norms for home loans. So even after the additional loan, the LTV ratio will remain within the regulatory guidelines.
For instance, you are buying a home worth Rs 50 lakh and the maximum loan amount you would get will be 80% of this value, which is Rs 40 lakh. However, if the bank has sanctioned only Rs 35 lakh as home loan, then you can get Rs 5 lakh more with the IMGC cover .
SBI was the first bank to start the mortgage guarantee scheme in collaboration with IMGC, in 2018. The focus was on self-employed and non-salaried customers who find it difficult to own their first home because of loan problems. Under this product, home loan applicants can avail higher finance based on their risk grade by opting for IMGC default guarantee cover. The offering will help increase home loan eligibility by up to 15%. So far, IMGC has partnered with 23 lenders, both banks and NBFCs, to offer the home loans.
How much will it cost to take additional loan with IMGC guarantee?
There is typically a one-time fee associated with an IMGC-facilitated home loan. “The exact charge can vary depending on the loan amount, the risk profile of the borrower, and the terms agreed upon with the lender. It’s built into the loan amount and is paid at the time of disbursement. The cost is nominal, at an additional Rs 10-12 for EMI of a lakh,” says Anuj Sharma Chief Operations Officer, India Mortgage Guarantee Corporation. For instance, on a Rs 30 lakh home loan, the one-time fee for IMGC guarantee that you would need to pay would work out to Rs 300 to Rs 360.
Besides the one-time fee, the borrower may have to pay a higher interest rate as well under this scheme. “The interest rate depends on the lending institution, as in some cases there is no additional rate, but in some there is a premium charged (usually 25-50 bps) over and above the normal home loan rate,” says Sharma.
Despite higher cost, IMGC-assisted home loan may be cheaper
When a lender is offering you a lower home loan amount than what you need, you would only have two options — go for a cheaper home or borrow the rest from some other source. If you decide to borrow from other sources — such as personal loan, loan against gold, etc — you will end up paying much higher for it than under the mortgage guarantee scheme.
“While personal loans and gold loans might offer quicker access to funds, they typically come with higher interest rates and lower repayment period compared to IMGC-assisted home loans,” says Sharma.
Gold loans usually carry interest rates of 9-15% and personal loans can have rates of 10-24%, depending on the borrower’s credit profile and the lender’s policies. Through the IMGC guarantee route, home loans remain significantly cheaper even with the additional interest rate, he explains.
For instance, if you want a home loan of Rs 40 lakh at 9.25% for 20 years, your EMI would be around Rs 36,635. But if the bank offers you only Rs 35 lakh, you would have to take a personal loan of Rs 5 lakh at 12% for a tenure of 5 years.
While the EMI on the home loan of Rs 35 lakh would be Rs 32,055, the EMI of the personal loan would be Rs 11,122. It means you would have to pay Rs 43,177 as total EMI if you do not go for the IMGC offer. However, if you go for the IMGC offer, your EMI will rise only marginally to Rs 37,285, if the interest rate is 25 bps higher than the interest rate offered by the lender, which is 9.5%.
“This cost-effectiveness makes IMGC-facilitated home loans a more attractive option for borrowers who need higher loan amounts or those who do not qualify for conventional home loans due to credit or income issues. Moreover, home loans have longer repayment tenures (up to 30 years), which can result in lower monthly EMIs compared with the shorter tenures of gold and personal loans, offering better financial flexibility.
In case of default, who takes charge of the property -the bank or IMGC?
Sharma explains that in the case of a loan default, the primary charge of the property remains with the lending institution. IMGC provides a mortgage guarantee, which is a first-loss default guarantee (FLDG), that compensates the lender for a portion of the losses in the event of a default. However, the ownership and the right to take charge of the property in the event of a default lie with the lender.
The lender has the right to enforce the security interest on the mortgaged property to recover the outstanding loan amount. This process is governed by the provisions of the SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act), which allows financial institutions to auction residential or commercial properties to recover loans.
IMGC’s role is to provide a first loss guarantee to the lender for a part of the loan amount, which can help mitigate the risk and potentially reduce the loss severity.
“IMGC acts as a guarantor, stepping in to cover the lender’s losses only if the borrower defaults and the lender has exhausted all recovery measures. Essentially, IMGC compensates the bank for any shortfall after the property is auctioned, thus minimising the financial impact on the bank. However, IMGC itself does not take possession of the property; this responsibility lies with the bank, which follows due legal process to recover its dues,” explains Shetty.
Should you go for the additional loan with IMGC cover?
The IMGC option can make the EMI affordable in the initial years when compared with the other borrowing options, especially when you are getting the IMGC cover without any additional interest. Even with a marginally higher interest rate of 0.25%, the situation will not change much and you would be able to easily afford the EMI. However, if the cost goes higher, you need to calculate the net benefit.
“Some lenders might charge administrative or processing fees with the arrangement and maintenance of the IMGC guarantee. It’s essential for borrowers to get a clear understanding of all applicable charges and fees from their lender to fully understand the total cost of their home loan. Comparing these costs with the potential benefits and security of an IMGC-facilitated loan can help borrowers make informed decisions,” adds Shetty.
If the IMGC cover comes at a higher cost, explore the home loan options of other lenders to see if you can get a higher loan amount at a lower rate. If not, calculate the overall cost of the IMGC cover during full tenure of the loan. If you find the additional cost is not too big, go ahead and borrow a bigger amount using IMGC’s default guarantee.