Now, you have to pay lesser initial amount while buying a house

There is good news for those who were planning to buy a home this festive season. Now, they will have to shell out a lower amount as initial contribution. The housing finance regulator, the National Housing Bank, or NHB, has increased the loan-to-value (LTV) ratio to 90% value of the property. This will apply only to loans from housing finance companies or HFCs.

Mortgage guarantee, also known as mortgage insurance, is a product which compensates lending institutions or HFCs for losses that may arise in case a home owner defaults on his loan. India's first mortgage guarantee company, India Mortgage Guarantee Corporation (IMGC), was established by NHB in 2012.

However, the LTV ratio will remain the same for a person applying for a loan above Rs 20 lakh but who doesn't take the loan under the mortgage guarantee programme. Let us explain it with an example. In the earlier scenario, there were only two parties involved, a borrower and an HFC. If a person approached an HFC for a loan of Rs 1 crore, he was entitled to get up to Rs 75 lakh. But now, if a person applies to an HFC for a loan of Rs 1 crore and agrees to go through the mortgage guarantee programme, he can get a loan of up to Rs 90 lakh. So, now, basically there will be three parties involved: the borrower, the HFC and the mortgage guarantee company.

For availing the facility of mortgage guarantee, the borrower will have to pay a premium, just like he pays for health insurance or life insurance, or the HFC will bear the cost. But experts believe it is unlikely that the HFCs will bear the cost; it will ultimately be passed on to borrowers.

"It is good for individuals, especially for the salaried class. Until now, to a buy a property of Rs 1 crore, they had to arrange for Rs 25 lakh. Now, by taking a loan under the mortgage guarantee programme, they will have to give only Rs 10 lakh as their contribution," says Sachin Choudhary, mortgage business head, Indiabulls Housing Finance Ltd. He added that it was a good move for mortgage guarantee companies as it would help them get a lot of leeway in the market.

"We don't see the need for mortgage guarantee under the current limit of 75%. For HFCs, we will get more customers with limited risk", he adds. Brijesh Panami, CEO, distribution, Destimoney Enterprises, believes this is a win-win situation for both HFCs and customers. "The consumer is getting the best value for his property. As the HFC will be disbursing a higher loan, it will earn higher interest income. It will also act as an anti-attrition tool because if they are meeting customers' demand, customers will not hunt for the extra money they would have needed. If the customer doesn't get his requirement fulfilled by a secured loan, then he hunts for an unsecured loan," he says.

Anil Sachidanand, MD & CEO, Aspire Housing Finance Company, says this has been done to encourage the mortgage guarantee programme in India, which is a welcome move.

However, he believes that reducing the upfront contribution limit required in case of retail loans is very negative for the savings habit of individuals as their contribution to the house will now be very low. In case property prices go down, they will have little incentive to repay the loan.