When granting the loan, the property is taken as security for the repayment of the loan. Therefore, it is usual to grant only up to 75 per cent or so as loan. The loan applicant also must have a stake. He cannot expect the HFC alone to provide the entire cost as loan. Therefore, 100 per cent of the value of the house is never given as loan.

We now come to the next aspect of the housing loan. After looking at the applicant, his income, employment etc and having arrived at the amount of loan based on (up to) 40 per cent MLSC, the HFC issues asanction letter. Such a letter contains all the terms and conditions such as, amount of loan, the term of the loan, the description of the property, repayment term, rate of interest, security and all such matters.

Since the house or flat is to be offered as security, the HFC would like to have a close look at the legal papers or title papers of the property. So a security is made with the help of a lawyer. Some HFCs have their own in-house experts attending to this job.

Title papers usually consist of a sale deed or partition deed, will or settlement deed, encumbrance certificates (for at least 15 years), transfer certificates, agreement with builder and developers, letters of allotment in cases where land or flat is allotted by a city development authority. Usually, the chain of title is examined for at least 12-15 years to see whether the loan applicant has proper title or no.

The security of the house or flat is done by way of what is called equitable mortgage. It is a very simple method of creatingmortgage. The original title papers of the house or flat are deposited with the HFC. This type of mortgage is almost without any cost. When the loan is repaid the HFC returns the title papers to the owner. A valuation of the property to be mortgaged is also done with the help of a qualified valuer who is also an engineer.

HFCs usually take some additional securities which are called collateral securities. These may be in the form of guarantee from one or two persons, assignment of life insurance policies, deposit of shares, and units or other securities.

These additional securities are taken with the hope that if a loan is not paid back recourse may be taken to such securities instead of depending upon the mortgage of the property which is the last resort. Guarantors, when alerted, become very effective persons in prevailing upon the borrowers to fulfil their obligations.

When the loan sanction is complete with the acceptance by the applicant and the title deeds of the property are scrutinised and foundin order and a valuation is got done, the next step is disbursement. Normally loan is disbursed in stages depending mainly on the progress of the construction.

At the time of disbursement one has to go through what is called documentation, which simply means creating equitable mortgage, assigning life policies, signing various papers like guarantee, receipt, promissory note and such other papers.

What comes after disbursement? Repayment of course. But regular repayment does not start immediately. HFCs allow the applicant a period of about 18 months up to which they charge only interest on the loan disbursed. Once that period is over, the repayment starts in the form of what is known as EMI (equated monthly instalment).

What are the items that are equated? Loan repayment instalment and interest are equated. A single total amount which remains uniform through the loan period is charged every month. The EMI is a mathematically calculated figure which includes an element of interest and also an element ofprincipal.

Since EMI includes repayment of principal, normally interest should come down because one should not be made to pay interest on a portion of principal which is repaid. That is exactly what is meant by EMI being calculated with the help of a formula.

This formula takes into account the periodical repayment of the principal and calculates interest accordingly. However, whether the formula considers reduction in principal outstanding every month or every is an important question. Most HFCs adopt what is known as the annual rest method, that is, their EMI formula is so devised as to consider the reduction in principal outstanding only once a year.

The EMI stands head over shoulders as compared to other modes of repayments such as:

(i) Flat system used by hire purchase and leasing companies.
(ii) Reducing balance method (RBM) - Here principal is repaid either in monthly or quarterly, half yearly or yearly instalments and therefore with each repayment of principal share, interest isrecalculated. In RBM (where principal is repaid every month), principal share is repaid every month. But the total amount payable is not uniform throughout the term of the loan because under EMI there is an automatic calculation and the figure of EMI remains the same.
(iii) Bullet repayment - one goes on paying interest and the principal is paid at the end of the term in one lump sum.

In case of a default in payment of interest or payment of EMI, HFCs do levy certain charges like additional interest. Naturally, because they are put to loss as the amounts repaid in time would have helped them to re-lend to others and earn interest.

Some HFCs do allow a grace period of a week or so. Some others do not because the grace period has a tendency to get extended.

Sometimes, borrowers like to repay the entire loan before the term ends or make some bulk payments in between. There are many reasons for this. Receipt of a windfall amount, receipt of bonus or arrears due to salary revision, sale of some otherasset and such other fortuitous developments.

HFCs have mixed ways of looking at such full repayments or partial bulk repayments. If interest rates are going down, it will not be to the advantage for the HFCs to receive back the amounts in bulk. At the same time, would it not be good to see that money is coming back earlier than expected?

Some HFCs levy a certain fee if bulk repayments are made - say one per cent of the amount paid. This is not a big thing because the borrower wanting to repay can save all future interest.

Some people who take loan from HFCs wonder why HFCs make such a big fuss about legal scrutiny of title papers, income proof and such other matters. Some ask that after all the HFC is taking their house or flat as security. Then why worry about this and that? If it doesn't get repayment, it can sell my house and recover your loan.

The answer to this is simple. It is not the intention of any HFC to drag its customers to court. They help their customers to buy a house and they expectthem to live in that house happily. If loan installments are not repaid in time they do a hundred different things like telephoning the customer, writing to him, calling on him, requesting the guarantors to help and also requesting the employer to help. When all these steps fail then and only then will they think of enforcing the security.

The mortgage of the house can be likened to a fire engine. We want a fire engine in our town but we do not want to call it. Just because we do not want to call it, we cannot dispense with it. We don't want fire but if at all fire does occur then we want the fire engine.

An important thing to remember is that housing loans are taken by people and the loans are also repaid by people. All the papers, the title deeds, the guarantees etc are there.

They have their own place and importance. But in the final analysis it is the man who repays the loan. If the man is trustworthy, honourable and true to his word, he will repay, however difficult it is. If he is made ofdifferent stuff then he may not repay whatever may be the nature of security and paper work. How can we say whether a particular person will keep his word or not? It is not at all easy. Sometimes intuition or sixth sense helps. But the idea is simply to remember that paper work is very important but it is not the be all and end all. The man behind the papers matters.

The writer is managing director, The Synergy Mortgage Loan Co Ltd. Earlier, he retired as chief general manager, LIC Housing Finance Ltd.