Options to increase home loan eligibility

Normally 70 per cent and 80 per cent of the loan-to-value ratio is sanctioned to home loan borrower. This can be increased by providing collaterals in the form of life insurance policies, national saving certificates (NSC) and other investments.

Usually people avoid home insurance policy due to added costs but it is useful if unfortunately borrower expires. Here we will discuss about the investment options which can be used as collaterals with bank to increase the loan eligibility.

Life insurance: As many people do not buy home insurance policy therefore a life cover can be used as collateral. In case you do not have a life cover, then banks insist 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.”

Bank uses this collateral to recover their loan amount unfortunately the borrower expire during the repayment period. In such case lender then either request the insurance company 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 debt has been cleared 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: If 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 during the repayment period borrow expires then the lender can recover the outstanding loan amount by selling the shares. The leftover amount is paid to the family.

The shares have additional benefit that is their value increases and makes it easier for the banks to recover the loan. A banker said, “In many cases, the borrower’s dependents also get some amount.”

Other investments: The long term investment instruments such as NSC, Indira Vikas Patra, Kisan Vikas Patra and Mutual Funds can also be kept as security. According to experts 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.

Like shares these documents are also needed to be endorsed in the name of the bank, if taken as security for a loan. “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, unfortunately borrower dies, a similar formula is used as before.

Property: In case you own more than one property then you can used it as collateral. In this case transactions are done in two ways:

1. The property documents are to be kept with the lender.

2. 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. In case the borrower dies before the settlement of the loan, the lender can sell the property and recover the loan amount.

Fixed deposits (FDs): You can keep FD as collateral with the lender but the FD should be of the same bank from which you have taken home loan. In this case also if the borrower dies before the settlement of the loan the outstanding is recovered from this.

Public Provident Fund: The banks have stopped accepting PF. “PF is not an instrument, it is an account,” said Manian. Reason being, as per law, no authority is allowed to freeze your PPF account except if it is to set-off your income tax.