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All you wanted to know about interim security on home loans
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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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When it comes to loans, the biggest ones that most people take tend to be home loans. With bigger loan amounts, risks increase. In general, banks tend to ask for some sort of security from borrowers for almost all types of loans. However, in certain cases, it could disburse a loan even without being in full possession of such a security, generally for a short period. In such cases, the banks could demand an ‘interim security’ from borrowers.
This is a type of security that is provided for an ‘interim’ period, until the full security can be provided. In the context of home loans, lenders do not generally ask for interim security, but they could do so in a few cases. Let us look at some such cases in detail:
When a loan is taken for a property that is under construction, the actual value of the property is lower than what is stated in the house agreement being mortgaged with the bank. Technically, on paper, the security provided is lesser than the loan amount in such cases, so lenders might ask borrowers to provide an interim security, which is equal to the difference between the partial value of the property and the loan amount. This could be in the form of an insurance policy, shares, other investments, or third-party guarantees.
Not all banks insist on interim security for funding an under-construction property. In some cases, where the builder has a good track record and the market value of the property is rising, loans are disbursed without any interim security.
Banks could demand interim security when borrowers shift their loans from one bank to another. Generally, for loan transfers, borrowers complete their paperwork and other formalities with the new bank and take a cheque for the outstanding loan amount. This cheque is issued based on photocopies of the original property documents. When the old lender realizes the cheque, the loan is closed, and only then are the property documents handed over to the borrower. This process can take anywhere between 30-40 days. Technically, the new bank is disbursing the loan even before receiving the original documents. For a short time, the loan is without any security; to cover this risk, the new bank could ask the borrower to provide an interim security until it receives the mortgage papers.
Interim security is based on the assumption that a borrower might try to trick the lender. To cover this risk, lenders have asked for interim security on a case-to-case basis so far. However, with the RBI pushing banks to come out with more customer-friendly policies, it is likely that banks will soon stop asking borrowers to provide interim security. This will help eliminate hassles in availing home loans.
Disclaimer: Copyright Kotak Mahindra Bank Ltd.
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