I found an interesting article in the DNA paper Bangalore edition today that says banks are liable to label you as defaulter if there is a situation that your property’s current value falls below your loan outstanding amount. They are liable to ask you for more guarantee in terms of mortgages or for that matter sieze your house and put it up for auction. This is a thin line clause in the agreement you sign when you take the loan which we dont notice. More details from the paper given below!
If you are yet to buy a house, you should rejoice. If you have borrowed to buy one, you shouldn’t, and not only because the value of your investment is going down. Reason: Even if you have been assiduously paying your equated monthly installments (EMIs), your house is potentially under threat.Most home loan lenders put in a clause in the mortgage agreement which empowers them to seize the property or ask you to bring in extra collateral if house prices fall dramatically.
If you are not able to do so, you can be termed a defaulter, giving the bank the right to seize and sell the flat or house bought on the home loan. Typically, a default happens when the borrower of the home loan cannot carry on paying the EMIs to repay the loan. Trouble comes from an innocuous sounding “Depreciation of Security” clause, one of the 15-and-odd clauses that constitute an “event of default” in case of a home loan. A typical “Depreciation of Security” clause reads: “If any property on which the security for the loan is created depreciates in value to such an extent that, in the opinion of the bank, further security should be given and such security is not given….”
What does this legalese mean? Any bank gives out a home loan against the house as security. In case the borrower defaults on the loan, the bank can recover the loan by simply selling the flat or house. For this to happen, the market value of the flat at any point of time should be greater than or equal to the home loan that is still outstanding. To protect itself, the bank can ask for some extra security or collateral from the borrower.
If the borrower cannot come up with any extra security, the bank can term him a defaulter. On being termed a defaulter, the loan outstanding becomes due and immediately payable and the bank can take possession of the house or flat and sell it to recover the balance.