Watu,

I had an interesting discussion with some pal jana. She says that she took out a mortgage at a rate of 12% and was evaluated for that amount. Barely two years into the payment, the bank doubled the rate and she is supposed to pay about double what she had been paying. The issue that roused me was the fact that the amount being demanded by the bank goes beyond what she is legally allowed to be deducted i.e her take home goes below the one third threshold.
^ Is the bank legally allowed to deduct the new amuount?
^ Can she be legally obliged to pay an amount she would never have qualified for even at the beginning
^ What way out does she have ( she does not want to lose he house)

Please help good people

the third rule applies. what my bank does is to increase the repayment period. The issue is somewhere in the fine print.

The current scenario is a very painful but short term phenomena. To keep her head above the water, the repayment MUST somehow cover the interest for the month and have something (however small) for the principal, otherwise the loan amount will increase. The bank will be quite happy to have the loan amount increase as that would precipitate default and hence repossession.

@Bwenyenye, 1/3 rule applies to government employees, and specifically to deductions 'at source'. The motivation for this was not consumer protection (most culprits were MFIs and SACCOs rather than banks), but actually, employees were taking so many loans so that total repayments were MORE THAN net salary, meaning the paymaster was expected to remit a negative salary.

What the paymaster instead did was to remit to lenders repayments (almost) equal to the net salary, with 2 serious implications:
1. The paymaster was expected to 'remember' how much arrears the employee owed lenders
2. Lenders complained when their expected remittances did not come, and often petitioned when their repayment was dropped in favour of another institution

The government was fed up and decided lenders my foot


Second, when a customer signs a loan contract, it essentially is a contract for paying:
1. principal
2. an interest rate future(s) contract


Some banks offer customers a choice between variable rate and fixed rates. The interest rate contract covers the funding of the principal amount. In the first case, the principal is funded by money borrowed from the same market as funds government paper, in the second case, the customer transfers the funding risk to the bank and pays a premium for it.

I assure you that when the lady took a loan, mortgages were available in the market, likely as:
a. 14% fixed rate (entire life of loan)
b. 12% variable rate

Seeing the fixed rate was 6% costlier (in terms of monthly repayment), she made the unfortunate decision to take a variable rate.

General advice, never agree a contract that ties you with a FUTURE / FORWARD and leaves a bank with an OPTION

To answer your questions:
a. the bank is not entitled to deduct money, its just a convenience to the customer. BUT, she is obliged to arrange for the monthly repayment to reflect in the banks books (in this case, the loan account)
b. she is obliged to make payments as per contract. If the new repayment is within contract terms, YES
c. The only way out is hope to God interest rate pressure eases. She can also negotiate for a repayment plan (as noted by GGK) where as a minimum she must meet interest rate obligation

Cheers guys! Very insightful. Infact, I think she better talk to the bank.

I'll wait for 2011 FY bank results to verify