Facing a home loan default? Here's help

Sell the property if bought for investment purpose.

As a joke goes, if you don't love your job, take a home loan. However, as a home loan is for a significantly long period (10-20 years or more), there can be times when things aren't financially rosy for the family. 

What happens, for instance, if you or your spouse lose the job or quit after taking the home loan? If you don't have a strong corpus or a family to ensure a smooth transition, there could be serious trouble. 

Financial planners say many clients go through such situations. There are cases where the family has purchased a property by exhausting both the husband and wife's borrowing limits, sometimes on multiple loans. When things go wrong with one partner, all the finances take a serious hit. 

For example, Rajan Sinha (name changed) had to sell his land to partly pay the home loan dues when he lost his job with a private airline.

This brought the equated monthly instalment (EMI) down from Rs 70,000 to Rs 20,000, a more manageable number, since his wife was working. Sinha was lucky because he had a small land parcel in Mulund, suburban Mumbai. Many might not have such a cushion. 

Says Kartik Jhaveri, director, Tanscend India: "We have had clients who have locked up more than half their salaries in properties and then lost their jobs. In such circumstances, they sell off other properties even at a five to 10 per cent discount." He says he's had clients who paid the fee for financial planning, only to find they had no money to invest in other instruments due to overexposure to property. 

The problem could become really serious if the layoff period is too long. The question is how to keep yourself afloat during the period and pay EMIs regularly.

"Defaulting will hurt credit ratings and scope for future loans will dry up for the borrower," says a former retail head of a leading public sector bank. As it is, if a person defaults for three months, the loan turns into a non-performing asset (NPA) and after that, the bank initiates proceedings under the stringent Sarfaesi Act to auction the property. "The entire process could take six months or so," he adds. 

Start with emergency corpus and investments: One realises the importance of an emergency corpus at such times. Usually, financial planners advise having a corpus equal to six months' take-home salary. This will help pay instalments during a layoff period. If one does not have that option, start liquidating investments. "Fixed deposits and mutual funds are the first instruments one can liquidate," says Suresh Sadagopan of Ladder7 Financial Advisories. 

Then, insurance schemes: Many borrowers have bought life insurance schemes, which have a saving component. Typically, there are traditional plans which give low returns but can be used to raise a loan. Use such schemes to continue making payments. "In fact, if you have three or four such schemes that will not yield great survival benefits, you can even use these before touching your investments," says a financial planner. 

Finally, provident fund corpus: Ideally, one should avoid using it because this is the retirement corpus. But, if you have no other option, you can use the retirement corpus to pay regular instalments.

"Remember that if you have not completed five years and are withdrawing the money because of a job loss, there will be a tax on the withdrawal. If you have completed five years, there will be no tax on the withdrawal. But, you will have to open a new account when you get another job," adds Jhaveri. 

Talk to the bank: If things are really bad, approach the bank for a moratorium or refinancing. "But, if the loan is, say, Rs 50-60 lakh and the loan repayment done is only Rs 2-3 lakh, the bank might prefer to auction it instead of giving a moratorium or refinancing," says Sadagopan. However, if you have repaid the majority of the loan, such as 60-70 per cent, the bank might consider the case. 

If you are in a position where you feel the financial situation will change in a few months and you will get a job, approach the bank for deferral of payments. The bank might grant relief, giving you a few months to stabilise your cash flows.

Once these few months are over, the EMIs will restart, depending on your terms. There will also be late payment penalties. These charges are applicable for payments after their due date. 

If the EMI is too high, one can seek refinancing for lowering the payout. However, the bank will have to be convinced about repayment capacity.

For example, if the initial loan of Rs 50 lakh was taken for 20 years at a 10 per cent interest rate, the EMI would be Rs 48,251.

If the job loss happens after five years and the borrower seeks another 20-year loan on the dues of Rs 44.9 lakh at the same rate of interest, the EMI would come down to Rs 43,331. But, remember the interest payout will be significantly higher, as the loan tenure is getting increased by another five years. 

Of course, financial planners are in unison about one thing - if it is a property bought as an investment, one should put it on sale immediately.