Mortgage Guarantee can help customers get a higher loan amount among many other benefits.
Mortgage Guarantee can help customers get a higher loan amount among many other benefits. Shrikant Shrivastava, Chief Risk Officer, India Mortgage Guarantee Corporation in a conversation with Himali Patel, explains how mortgage guarantee helps customers get higher loan amount, negotiate better commercial terms with the lenders.
Mortgage guarantee indeed is sprucing up the housing finance segment. A mortgage guarantee is a financial product which compensates lending institutions or housing finance companies for losses that may arise when a home owner defaults on a mortgage loan. What mortgage guarantee does is that it acts as a risk transfer tool. The risk of home loan gets transferred from the bank/housing finance company to the mortgage guarantee company and in this process helps mortgage lenders penetrate the home loan market deeper and wider.
Also, mortgage guarantee products are witnessing an uptick in demand among banks and NBFCs The risk mitigation support offered by the products will help banks – which were otherwise wary of lending to certain segments of customers – extend housing loans to those in need. Foremost advantages of mortgage guarantee are that it helps customers get higher loan amount, negotiate better commercial terms with the lenders or move to bigger brands with better customer service and in many cases get the customer a home loan that he was earlier being denied by a formal lending institution.
Our prime focus lies in the affordable housing segment and this segment is witnessing overwhelming demand, across diverse demographic segments and geographies. With positive support from the government and demand and supply side issues getting dissolved, this demand is bound to snowball into a large segment, if not the largest. The government is also giving the right impetus and a significantly large financial subsidy. Unfortunately, mortgage origination by Banks and HFCs are very skewed in India. Top 12 states account for 90 per cent of mortgage origination every year. Private lenders, both banks & HFCs are even more skewed in their origination, close to 65 per cent of their total origination takes place in just top 10 cities
Mortgage Guarantee supports borrower profiles such as self-employed businessmen and also employees working with such businesses, especially those in the micro, small and medium enterprises. The self-employed and employees working with such small enterprises are equal in population to the formal salaried segment borrowers, however they are largely underserved or unserved especially by the larger banks and large HFC, primarily for two reasons, higher default rates and unavailability of documents to process their loan for the desired amount. Mortage Guarantee helps all these borrowers’ tide over these hurdle with ease. It assures lenders of repayment guarantee by covering any loss arising out of any eventual default and at the same time through its process of personal discussion creates proxies for income of these borrowers who are largely below taxable threshold.
MG also supports two more borrower segments. Young borrowers’ compromises on the choice of house or defers their purchase decision due to loan amount eligibility issues. Loan eligibility increases when a borrower takes a longer tenor loan since monthly EMI becomes lower so with the same income, he/she can service higher loan amounts. MG helps increase loan affordability by offering full term of 30 years. While a 30-year loan is offered by many lenders these days, but to avail the full 30-year term, the borrow has to be less than 30 years of age at the time loan application. If he / she is 35 or say 38 years at the time of loan application, the lenders normally reduces the 30-year loan by 5-8 years i.e. and give 22-25 year loan tenor.
With MG lenders offer 30-year term even when the borrower is up to 40 year at the time of loan application. Such young borrowers also face challenges with down payment due to lower savings, with higher loan amount with the support of MG, the issue of down payment and savings also get resolved and the EMI payment are also well within manageable limits for the borrower for the same income level.