If They Don’t Finish Your Property, You Still Have To Pay The Bank

Comments Off Written on August 10th, 2014 by
Categories: RealEstate, Suckered

Defaulting on housing loan EMIs is not a good idea, it seems, even if the builder doesn’t deliver and you win a case against him. From Economic Times:

It may become risky if she decides to stop paying, as Kavita Thonangi, who works with consultancy firm Deloitte, found out a few years back. Thonangi had bought a two-bedroom apartment in a Hyderabad project by Ramalinga Raju-owned Maytas Properties in 2006. It was to be delivered by December 2008 and in January 2009, the Saytam scam was unearthed and Raju, who also headed the software firm, was jailed. The project was still only at foundation level.

While Thonangi continued to pay her EMIs, in 2011 she informed the bank that she was filing a case with the AP State Consumer Disputes Redressal Commission and would stop her EMIs. "But the bank later filed a criminal case for cheque bounce on me," she says.

Though she won the case at the state commission, and the decision was upheld by the national commission as well as the Supreme Court, asking the builder to refund money with 12% interest, the irony was that she can't take another loan today."My CIBIL rating has fallen drastically, because I stopped paying my EMIs. I can't take a loan from any bank even though I have won the cases," she rues.

This applies to all such loans, even where the builder has decided to pay the EMI (which is the new norm nowadays!). If the builder defaults and runs away, you don’t have the property, and if you don’t pay the EMI now it’s your credit score that gets hosed.

In fact, if your housing loan is taken for an under-construction house and it is not constructed within 3 years of taking the loan, future interest payments on your self-occupied house will have  reduced tax-deduction. Instead of Rs. 200,000 a year (the increased limit on such deductions) you get a deduction of only Rs. 30,000 per year!

And now, builders are on the hock too - it seems the Supreme Court has ruled that builders must pay tax on unsold homes as if they had received rent on them (just like if you own a house that you haven’t rented out). It seems there are a 100,000 houses (or more) that are unsold and held by builders who haven’t been able to sell them - and the situation will be alarming if they have to pay tax on “deemed” rent (even if you don’t rent it out, you’re assumed to have received a fair rent). Hopefully, this means they offer big discounts to sell such properties - which is necessary for a housing price correction.

Overall, under-construction houses always pose a big risk. I have a long standing view that I don’t like them. Now, we have abuse - builders who’ve used the concept to get funding at a low cost (i.e. your CIBIL score) and overleveraged themselves, investors who’ve bought a lot of properties with only part money down (builder pays EMI) where they expected to sell quickly at a profit, and finally, end-buyers who didn’t consider the consequences of what happens if the builder defaults. While this industry needs a regulator the only way regulation will come is if there is a big crisis; because that’s how we do things. 

Note: In the above case, though, it’s not apparent why Ms. Thonangi didn’t just repay the amount (which was awarded to her by the  Supreme Court) to the bank and clear away past EMIs. I suppose if she did that she wouldn’t have to have a negative CIBIL record? But obviously the devil is in the details, and it could be our horrible banking system which decides on its whims and fancies what can or cannot go on credit scores.

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The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.