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Banks have started increasing the margin money for home loans following the downturn in realty markets.
Banks now want to ensure that even in the case of a sharp decline in prices and a default by the borrower, it should be able to recover the loan amount.
It's tougher buying a home now:Margin money is the percentage of purchase price (own contribution) that the buyer has to bring. The balance is provided by the bank.However, the call for higher margins is likely to further depress the demand for residential property, at a time when high interest rates have already made house purchases expensive.
Many banks have already increased margin money by 5-25 percentage points depending on the amount borrowed. Country’s largest lender, State Bank of India (SBI), for instance, now prescribes a margin money of 25% for loans up to Rs 30 lakh, compared with 20% earlier. For loans up to Rs 1 crore, SBI has increased margin money requirement to 30% from 20%, and for loans above that, to 40% from 25%.
“We have increased the margin requirement in order to secure our advances from any price fluctuation in the market. Also, the requirement of higher margin money would ensure that only reasonably sound and credit-worthy borrowers are provided advances. This in turn would help keep the risk lower,” an SBI official said.
The new SBI rates are effective from October 10. At least two other large public sector banks have also increased the margin money requirement by 5-10 percentage points, while others are likely to follow suit. Officials of these banks were unavailable for comment.
Large private sector banks such as HDFC Bank and ICICI Bank have, however, not increased the margin money. Though they have tightened the prudential norms for giving loans and deciding the creditworthiness of borrowers.
“We have not made any changes in the margin money requirement for home loans as we have been fairly prudent in our lending process,” an ICICI Bank official said. HDFC Bank officials said that there was no urgency to increase the margin money as most of the home loans in the past one year averaged around 65% of the property cost.
Moreover, the bank is taking stringent measures to ensure that only borrowers with sound repayment capacity are extended the advances.
The tightening of loan mechanism and higher margin requirement come at a time when the real estate sector is facing a severe demand crisis. Earlier, buyers could borrow almost the entire sale consideration, up to 85% of the price in loan and the balance for furnishing the house.
The buyers will now have to pay up to 40% of the price from their own pocket. This is sure to make home buying difficult.
-The Economic Times
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2) Vijaya Bank moves to control home loan defaults
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