| :: | There is a lot of noise out there. From the institutions that offer financial products and services; and from the distributors who sell them. But there is little sound advice out there which is aimed at actually helping you understand these products and services better. Here
Personalfn.com plugs this gap!
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| Guaranteeing a home loan? Think again |
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The practice of asking for guarantors for home loans by housing finance companies (HFCs) is slowly on the wane now. However, under certain circumstances, HFCs even today ask for a guarantor to a home loan. In this note we explain the implications of being a guarantor for a home loan and how it affects an individual’s home loan eligibility.
Simply put, a guarantor is someone who is ‘liable to pay’ in case the original home loan borrower (i.e. the ‘guaranteed’) makes a default on his home loan repayments. In such a scenario, the HFC will ask the guarantor to cough up an amount equal to the default. Guarantors therefore need to be very sure about the credibility of the borrower before agreeing to become his guarantor.
Becoming a guarantor also affects an individual’s ‘capacity to borrow’ adversely. An illustration will help in understanding things better.
Want to be a guarantor? Think
twice
| Table A |
| Monthly income (Rs) |
40,000 |
(Assumed) Income
available for
EMI payments (i.e. 50% of Rs 40,000) (Rs) |
20,000 |
| Rate of interest
(%) |
7.50 |
| Tenure (Yrs) |
20 |
| EMI (Rs) |
806 |
| Home loan
eligibility (Rs) |
2,482,000 |
|
| Table B |
| Monthly income (Rs) |
40,000 |
(Assumed) Income
available for
EMI payments (i.e. 50% of Rs 40,000) (Rs) |
20,000 |
| Less: Friend's
EMI (Rs) |
8,000 |
| (Revised) Income
available for EMI payments (Rs) |
12,000 |
| Rate of interest
(%) |
7.50 |
| Tenure (Yrs) |
20 |
| EMI (Rs) |
806 |
| Home loan
eligibility (Rs) |
1,489,000 |
|
Suppose an individual is earning a monthly income of Rs 40,000. Based on this amount, a certain HFC, say A Ltd, will assume 50% of his income as being available for making EMI payments. In this example, it works out to Rs 20,000 (i.e. 50% of Rs 40,000).
Assuming an interest rate of 7.50% for a 20-Yr tenure, the EMI per lakh works out to Rs 806. As table A shows, based on the figures given above, the home loan eligibility works out to approximately Rs 2,482,000.
Click here to know your home loan eligibility
Now assume that the individual has stood as a guarantor for a home loan worth Rs 1,000,000 taken by his friend and the EMI on the same is approximately Rs 8,000. The HFC in this case, will work out the home loan eligibility for this individual as shown in table B above.
As per table B, the individual’s income available for EMI payments remains the same as before i.e. 50% of his monthly income. However, an additional amount of Rs 8,000 is deducted from the said ‘income available’ by the HFC. By doing so, the HFC safeguards itself against future ‘probable liabilities’ in case the individual’s friend defaults in making his EMI payments.
This exercise brings down the individual’s income available for his own EMI payments down to Rs 12,000. Other factors remaining the same, the revised home loan eligibility now works out to approximately Rs 1,489,000.
So does being a guarantor mean that an individual will not be eligible for a regular loan amount? Not quite. An individual can notify the HFC as well as the borrower (for whom the individual has stood as guarantor) that he wishes to cease being a guarantor to the amount borrowed. The HFC may then ask the borrower to make alternative arrangements for another guarantor. In such an instance, the individual will then be eligible for a regular loan amount, which is in tune with his income.
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