Mortgage Payments and Credit Ratings
If you are planning to buy a property (with a mortgage) any time soon please check your credit score. A very good strong score will ensure that you get a good rate, and a poor score will mean they will NOT consider your application. At least the top end guys will not consider you. Even if they were to give, it will be at very high rates.
What is a Mortgage?
It is a very big loan given to an individual based on his future earning capacity. The repayment includes an element of principal, interest, taxes, insurance, etc. and the amount that you repay is a very small portion of the loan as the loan stretches for 25 to 30 years!
As the loan is for such a long period the borrower (and the lender) should consider the ability to earn well for a long period of time and use the earnings to repay the loan. Only when you are doubly sure should you go for a mortgage. It is a very crucial commitment.
Can you skip a Mortgage Payment?
Like any regular payment sometimes it becomes difficult to repay a mortgage. Can you afford to skip a payment? The answer is NO. Mortgage is a crucial payment and you dare not default. If you delay the payment by as much as 45 days the chances are that the mortgage lender will inform Cibil and that will impact your ratings. Very soon your prospective employer could also turn you down if your score is not good. An amazing risk exists in mortgage default and you need to be very careful. So in case you must skip a payment go and talk to your lender. For example if your loan is about 5 years old, there is a chance that you can get a top up loan or a fresh loan for a bigger amount – assuming that some equity has built in the deal. So go and talk to the lender and reschedule the loan from 20 years to say 25 or 30 years! THIS WILL INCREASE YOUR INTEREST COSTS, but will reduce the EMI and thus make it more comfortable to repay…
Mortgage default is DANGEROUS
Mortgage is a big payment, so if you default the bad behavior stays in your report for a very long time – 7 years in the USA – I do not know how long in India. However given Indian conditions expect the number to be closer to 7 if not 7. So be very careful of a mortgage default. By talking to your lender you can somewhat mitigate this pain….
Yogesh
Sir,
Completely agree that one needs to maintain a good credit score. However, i am not sure if one can bargain for interest rates with lenders based on a good score. I am talking about Indian conditions.
LuckyOye
I find it sad that poor and middle class run the risk of totally damaged and destroyed future due to a few missed mortgage payments, which may add up to a lakh or two of rupees at most. Whereas the rich and powerful (or just ‘connected’) can default on thousands of crores of rupees taken in the name of their companies, and aren’t affected at the slightest.
This is the ‘modern’ financial system that we’ve created. It is good that subra is atleast warning us of the dangers of missing mortgage payments, but for people who may have lost their job or got stuck with callous builders (with no possession), this would be sad consolation.
On top of that, financial institutions engage in all sorts of unethical practices to improve their top and bottom lines. This is not just in India, even in developed countries, this is rampant (LIBOR manipulation etc.). Why, even entire nations like Greece are held hostage because they are unable to pay back their loans to ECB. Loans, which when originating itself, was clear that Greece could never pay back on those terms!