Are Indian borrowers, borrowing for their dream homes, setting themeslves up for a mortgage trap without even knowing that they are?
I recently got a call from a large lending organization pushing me a "floating" scheme, saying it had no fixed EMI scheme on offer! I had to either take a floating scheme or have none at all.
It is exactly these floating kind of schemes that have had many borrowers lose their homes in the US.
The current subprime mess in the US is attributed to AMTPA, a 1982 law.
Before AMTPA, banks were barred from making anything but the conventional fixed-rate, amortizing mortgages. However, in 1982, AMPTA lifted those restrictions, giving birth to all the new and exotic mortgages that have so many borrowers in a bind.
The various schemes are:
- Adjustable-rate mortgages (a norm in India), in which the interest rate become floating after a number of years.
- Balloon-payment mortgages, in which you pay very little in the beginning but (like in a balloon, the payments get outsized as they year goes by. For anyone in a job, you want payments to reduce as you retire, not increase.
- Interest-only mortgages, which require only repayment of interest (not principal too) during the first few years of the loan, only to hit borrowers with crushing monthly-payment resets once the new monthly payment kicks in.
- Option-ARM, considered the worst, which allows borrowers to keep borrowing even the interest to be paid, during the first few years. This is worse than than borrowing from a local money lender because "the interest on interest payments" gets tacked onto the size of the loan. So your Rs 300,000 mortgage can turn into a Rs 350,000 loan in a hurry, destroying any equity you have in your home.