Can't Pay Home Loan EMI

Here's how the bank will react to the situation and how you can negotiate with it to resolve it

Buying a house is the most expensive purchase you are likely to make, so you may need help in funding it in the form of loan. What if you take a home loan, but after some time, find yourself unable to ay the EMIs? There could be several reasons for this, from losing your job to depleting your savings for a medical exigency. Will the bank seize your property if you miss 2-3 mortgage payments? No, not immediately, but if you continue to default for six months, the bank will take over your house.

Attaching a property is the last thing a lender wants to do. Though banks have the power to enforce the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI) to recover non-performing assets without the intervention of a court of law, this is the last step they prefer to take.

A bank usually lets one mortgage payment default slip by, but for the next one, it will mail you a reminder to inform you that your payments are late. After three defaults, the bank will send a demand notice, asking you to pay your dues as soon as possible. If the borrower doesn't respond to any of the mails, the bank sends a legal notice through its legal department.

A bank waits for three months before declaring an asset a non-performing one. After the end of this period, the bank can officially term the home loan an NPA and start the process of recovering the property through the SARFAESI Act.

Even after invoking the Act, the bank gives the borrower a 2-month notice period to repay the dues. Finally, five months after the first default, the bank sends a notice, stating that it has valued the property for a certain sum and that it will auction the house on a particular date. This is usually set for a month from the date that the bank mails you the auction notice.

Banks and financial institutions are more interested in recovering the money than in starting legal proceedings as the procedure of attaching and auctioning a house is lengthy and takes time. So, they will persue the matter for at least six months before taking legal action.

The last state is usually when a borrower gets a notice from the Debt Recovery Tribunal (for loan amounts of more than 10 lakh). It is compulsory for you to attend the hearing that is set by the tribunal, where you can reach an agreement with the bank.

If you are serious about paying your dues and have a good repayment track record, the bank will be willing to offer a leeway. The first step that bank takes is to understand the reason for the default since a home loan is a secured one, with the bank having more control over the asset. If the bank is satisfied that the problem is genuine and that the borrower will start paying the EMI soon, it will be willing to wait for some more time. However, banks take such decisions on a case-to-case basis. In fact, a bank will allow you to reclaim your property even after it has seized it, though this has to be done before the auction takes place. Even if the auction date has been announced, the borrower can come in at any stage and pay the dues to save his property. However, if the bank has incurred any charges for announcing the auction, the borrower will have to pay these.

The main reason you need to start paying the EMI again, other than avoiding possession of your home by the bank, is to ensure that your credit score is not adversely affected. About 30% of your credit score is based on repayment history and a significant part of this usually depends on how regularly you repay your home loan, if you have taken one. Even one or two missed payments can negatively impact your credit score, and a continuous default will dent it severely, making it difficult to get loans or credit cards in the future.

However, if it seems that the situation may not improve even after six months, a better idea may be to sell the property. You can talk to the bank about this and use the sale proceeds to prepay the loan. Ensure that while the sale negotiations are on, you continue paying the EMIs. This will prove to the bank that you aren't taking it for a ride and will ensure that your credit score doesn't dip.

No Second House

Why not to buy a second house

If you own more than one house, you have to pay tax on the rent earned from the house you are not occupying. Even if the house is lying vacant, you have to pay tax on the deemed rental income from that property based on the prevailing rate in that area. Only one of the properties will be allowed to be treated as self-occupied and the others will earn a notional income, which will be taxed at the normal rates after 30% standard deduction. So, if you have a second flat lying vacant in an area, where the monthly rental is Rs 20,000, it will push up your taxable income by Rs 1.68 lakh (Rs 20,000 x 12 = Rs 2.4 lakh, less 30% = Rs 1.68 lakh).

This tax has been a major disincentive for buying a second house as an investment. However, the DTC proposes to change the rule regarding notional income. If the proposal is passed by Parliament, a house owner won't have to pay tax on the deemed rent received from a house that is vacant from 1 April 2012.

There are, however, other taxation issues to content with. Owners of vacant residential properties also have to pay wealth tax if their combined wealth exceeds Rs 30 lakh. The assets considered while assessing an individual's wealth include gold, vacant residential property, luxury watches, cars, yachts, helicopters, pieces of art and artifacts, and hard cash. Wealth tax is 1% of the amount by which the combined value of these assets exceeds the Rs 30 lakh limit. So, if you have a vacant flat worth Rs 80 lakh, you may not have to pay tax on the deemed rent from year 2012 onwards, but you will have to pay wealth tax of Rs 50,000 (1% of Rs 50 lakh). If you have other assets, such as jewellery, luxury car and artifacts, the liability rises further.

Wealth tax is a recurrent tax---it is payable on the same assets year after year, even though these assets have not created any value for the owner during the year. 

Commercial property, for instance, is a more tax-efficient investment than a second house. It is not only exempt from wealth but the returns are also higher than those from residential property. Such a property is also eligible for deduction of interest paid on a loan as well as the 30% standard deduction from rental income. So, even as it enjoys all the benefits and even offer a better cash flow, commercial property will not push up your tax liability if you are unable to find a suitable tenant.

What's taxable

• You are required to pay tax on rental income from the second house even if it is lying vacant
• If a person owns more than one house and it is vacant, its value is added while calculating the owner's wealth
• A 1% wealth tax is payable on the amount exceeding Rs 30 lakh
• Commercial property is not included while calculating the wealth of a person
• The interest paid on a loan taken to purchase commercial property is also eligible for tax deduction
• Commercial space usually fetches a higher rent than residential property. It is also possible to take a loan against this rental income
• The rental income from commercial property is eligible for 30% standard deduction as in the case of residential property

Resell Property

Resell Property in 3 years... and lose half of your gains

The profit made from the sale of a house is never a simple calculation involving the subtraction of purchase price from the sale price.A number of income-tax caveats kick in. If you buy an apartment for Rs 50 lakh and sell it two years later for Rs 1 crore, your profit from sale will not be Rs 50 lakh. It will be much lesser.

Here is how the maths works:

If you sell within three years of buying: The first thing is to take into account is tax liability. If you sell a flat within 36 months of buying it, the profit is added to your income for that year, and taxed accordingly. If you fall in the highest income tax bracket, the tax rate will be 30.9%, which comes to Rs 15.45 lakh.

If you have taken a home loan: You will also have to take into account what you actually paid for the property in the first place. For instance, if you taken a home loan of Rs 40 lakh for buying the apartment you would have been paying an interest of 9.5% for the past 24 months. Your equated monthly installments (EMI) would work out to Rs 37,285.

Now under Section 80C of the Income Tax Act, the principal of the home loan can be claimed as a tax deduction. But if the property is sold within five years of buying, the tax deductions are reversed.

During the early years of a loan tenure, a major part of the repayment is tagged under "interest repayment". In your case, of the nearly Rs 9 lakh repaid over two years, only Rs 1.78 lakh is the principal repayment. The principal component will be added to your income for the current year and taxed at 30.9%. This means another Rs 55,000 skimmed for your profit.

Also, for two years you paid interest of Rs 7.17 lakh on the home loan. This will be deducted from your capital gain, which comes down to Rs 26.83 lakh (Rs 34 lakh - Rs 7.17 lakh).

Of your remaining home loan principal, Rs 38.22 lakh (Rs 40 lakh - Rs 1.78 lakh repaid as principal), the bank will levy a prepayment charge of 2.25%, which works out to around Rs 86,000.

After these deductions, the actual profit on the sale is only Rs 25.97 lakh, nearly half of what you had dreamt of. Most investors look at short-term real estate investments the same way and get carried away by stories of friends or colleagues who made lakhs within a year. However, before you are inspired to do the same, do your calculations, or better still, stick to your investment for the long term.