Home loan Collateral
As property values are sky rocketing in the metros and other Tier 2 cities of the country, taking a home loan has become a Hobson’s choice for most buyers. Banks advance 80%-85% of the property value in the form of a home loan, depending on the borrower’s individual borrowing eligibility. As in the case of any other secured loan, in exchange for the amount advanced, banks demand a security from the borrower in the form of mortgage of the house. But did you know there is another form of security which may sometimes need to be given, popularly known as interim security?
As the name indicates, an interim security is a security which is to be provided for an interim time period, till the full security is provided. In the context of a home loan, this is applicable in three instances:
Instance 1:
The first instance is when the property in question is under construction. This means the borrower wants a loan to purchase a property which is not yet completed. As a result of this, the value of the property is actually not what is stated in the house agreement which is mortgaged with the bank. It is lower than this, as the construction is still in progress. Although the bank would not have advanced the entire loan amount and disburses only as per the construction timelines, the security provided is still lesser than the loan amount, on paper. As a result, the bank will want the buyer to provide another security which is equal to the value of the loan amount. This security which is to be provided till the construction is completed is known as interim security.
This interim security can be in the form of an insurance policy, the surrender value of which is equal to or more than the loan amount. It can also be in the form of shares and other investments pledged or guarantees from third party guarantors who are sound and solvent. The security so pledged should have clear title and should not have any encumbrances. This means that the security should not already be pledged towards another loan or liability.
Not all banks insist on an interim security for funding an under construction property. In some cases, when the market value of the property is on an increasing trend or if the builder has an impeccable record or if there is some other factor which leads the banker to believe that there will no issue in the completion of construction, the loan is disbursed without an interim security. In this case, the only security is that of the property mortgage to the bank.
Instance 2:
The second case when an interim security is demanded is when the borrower shifts his loan from one bank to another. With the Reserve Bank of India waiving prepayment charges on home loans, it is not uncommon today for borrowers to shift their home loan from one bank to another. The procedure when such a transfer happens is that the borrower completes his paperwork in the new bank and takes a cheque for the value of the loan outstanding in the old bank, on the basis of photocopies of the original property documents. The old bank receives the cheque in lieu of the outstanding loan, realizes the cheque, closes the loan and only then hands over the property documents to the borrower. All this takes at least 20-30 days’ time. The new bank will have to disburse the cheque pertaining to the outstanding loan amount even before receiving the original documents. So in effect, till the bank receives the papers, the loan is without any security and is open. In order to cover this risk, the new bank asks for a security till the time it receives the mortgage papers. This security is known as an interim security.
Usually, public sector banks insist on this interim security, which may be in the form of a third party guarantor. This proves to be a hindrance to borrowers when they shift their loans to nationalized banks. In December 2012, SBI waived this clause in a bid to grow its loan portfolio, provided the loans were serviced for 2 years at the time of transfer and the historical record is clean. Private Banks are generally more friendly in this respect and do not insist on an interim security. With RBI moving towards customer friendly policies, it can be expected that this requirement will need to waived off by all banks in the near future.
Instance 3:
The third instance when an interim security is demanded by some banks is for purchase cases, for the time period between the disbursement of the loan and the registered sale deed in the name of the borrower receives at the bank. This process usually takes between 15-30 days, and after registration, the borrower will need to collect the documents from the Register Office and submit them to the bank. Here again, the loan is without a security during this interim period. The borrower is therefore asked to bring in a security for this short time period. Again, this requirement is more common among public sector banks. Private banks are generally more lenient and do not insist on an interim security.