When you apply for a home loan, banks normally sanction between 70 per cent and 80 per cent of the loan-to-value ratio. The eligibility can be increased if collaterals are provided in the form of life insurance policies, national saving certificates (NSC) and other investments.
However, what happens if the borrower were to expire? While the best way to hedge against any eventuality is to buy a home insurance policy, many people often avoid it because of added costs. Here’s a list of investments that can be used as collaterals with the bank to increase the loan eligibility.
Life insurance: If you do not have a separate home insurance cover, a life cover is the most preferred collateral. And if you do not have a life cover, most banks insist that you have a term policy at least. S Govindan, general manager, Union Bank of India, said, “We encourage borrowers to take up a separate life cover for a home loan, as the life insurance policy is meant for dependents in an unforeseen situation.”
However, if you were to expire, the lender, in this situation, would either advise the insurance company about the total loan outstanding, requesting it to remit the entire amount due to them.
The lender, on its part, will adjust the loan outstanding and pay the balance to the borrower’s family or legal heir.
If all the financial obligations have been fulfilled, the policy papers are returned by the bank. The bank will write to the life insurance company to reassign or transfer the ownership back in the name of the borrower.
Shares: When shares are kept as collateral, the borrower has to transfer the ownership to the bank. K V S Manian, head (retail banking), Kotak Mahindra Bank, said, “Shares are in the demat form and therefore, need to be transferred in the name of the lender.”
In case the borrower expires in the interim, the lender would set off the outstanding loan amount by selling the shares. The leftover amount is paid to the family.
The additional benefit with shares is that their value increases and makes it easier for the banks to recover the loan. In many cases, the borrower’s dependents also get some amount,” said a banker.
Other investments: Long-term investment instruments such as NSC, Indira Vikas Patra, Kisan Vikas Patra and Mutual Funds can be kept as security. However, experts say it is discouraged. “These are meant for dependents of the borrower in an unfortunate circumstance. By using it as a security, the purpose is defeated,” said Govindan.
When using these documents as security for a loan, the borrower is needed to endorse it in the name of the bank. “Mutual funds are liened to the bank. But investments are considered only for high net worth clients who will not need to liquidate the investments,’ said Manian.
If the borrower dies, a similar formula is used as before.
Property: If you have more than one property, it can also be used as collateral. Here, the transactions are done in two ways:
1) Equitable Transfer: The borrower has to keep the property documents with the lender.
2) Registered Transfer: The property is registered in the name of the lender till the financial obligations are over.
“In most cases, the property is equitable,” said Manian. If the borrower dies before the settlement of the loan, the lender sells the property and recovers the loan amount.
Fixed deposits (FDs): This can only be done if you have an FD with the lender. The outstanding loan is set-off, if the loan obligation is not fulfilled and the borrower passes away.
Public Provident Fund: Provident fund (PF) is not accepted anymore. “PF is not an instrument, it is an account.,” said Manian. And as per law, no authority is allowed to freeze your PPF account except if it is to set-off your income tax.