Mortgage guarantees ensure risk of lending to certain consumers is reduced, promise to make home loans more accessible
Sample this: Two borrowers with similar age, income profiles and credit scores put in an application for a home loan. One is granted a loan with a 20-year tenure and at an 8.25 percent interest–the same rate the bank offers to customers with a high credit score. The second is sanctioned a lower amount and at a higher rate. He’s also made to provide further documentary evidence of his creditworthiness. Simply put, the bank is wary of the loan going bad.
This is a situation faced regularly by borrowers without a regular salaried income. Banks and other mortgage finance institutions find it hard to assess their repayment capability and err on the side of caution. Such customers are at a disadvantage and find themselves shut out of the market for home loans. They end up going to institutions that charge higher interest rates to take on the additional credit risk. Those in the informal economy–vegetable vendors, truck drivers, daily wage labourers–find it hard to get any mortgage finance at all.