Khyati Dharamsi/DNA
 
Mumbai, Aug 18: Even banks are bracing for a possible correction in the real estate market and it’s the prospective home loan borrowers who will be hit. Expecting a fall in property rates, lenders have either increased or are planning to increase the borrower’s share in the actual cost of a home — generally referred to as down payment.

Until recently, some banks had been financing up to 90-95% of the home purchase value while the conservative ones had been giving out 85-90% of the actual price as loan. But a DNA survey has found that some banks have now started increasing margins on home loans, which means borrowers will have to shell out more while buying that dream house.

Margin is a cushion that a bank leaves between the actual value of the house and the amount of loan granted. In effect, the bank doesn’t give out 100% of the price a buyer would have to pay. This is done to ensure that the bank is protected in case the value of the house turns out to be wrong or falls significantly.

Banks usually recover the loan amount by auctioning flats of the borrowers who default on repayment. When the price of a house falls below the amount the borrower is yet to repay, the bank might fetch a low value in the auction and suffer losses. Higher margins ensure minimal losses for lenders.

Kamlesh Rao, vice-president and business head of personal finance at Kotak Mahindra Bank, says, “The instances where 85-90% of the price of the property was given as loan have drastically reduced and the average is around 75-80% now for home loans. We have always been keeping our LTV’s (loan to value) below these current average levels.”

Even the public sector banks, which are already stricter with their margins, are also likely to increase the borrower’s share. An Indian Bank official told DNA, “We had been financing 85% [of the actual value] and continue to do so. But we may look at increasing the margin levels.”

Sujan Sinha, senior vice-president of retail assets at Axis Bank, says, “We try to maintain our margin higher at about 15-25% of the house value. 

“In some good cases we have been financing up to 90%. But people do not want to borrow more. Our average loan to value is less than 60%.”

There was a time when banks used to finance 115% of the home value to also provide for furnishings, etc. If the property prices fall, such banks would be hit badly, say bankers.

However, the largest home financer in the country, ICICI Bank, which provides loans under its subsidiary ICICI Home Finance, plans to stick to current margin levels. Rajiv Sabharwal, senior general manager, retail assets at ICICI Bank, says: “We have been giving out 85% of the value for the past two years. We have never given 90-97%. As long as the valuation is done well, 85% is a good figure. We have an in-house valuation expert and we are comfortable with 85%. A genuine buyer would need that kind of financing to buy a house.”

But logic tells us that the higher rate of financing would only be for borrowers with a good track record and others might have to save more before deciding to buy that dream house.