I have heard that some banks are offering mortgage as an overdraft facility for home loan borrowers. How does such a facility help? Which banks are offering such a scheme?
Yes the home loan industry is changing with times and owing to rising competition in the segment. Some banks have indeed introduced mortgage as an overdraft facility which allows the home loan borrower to park his or her extra funds in the loan account. Instead of prepaying the home loan or using the extra money one may have at hand to prepay the loan, you can park the money in the loan account.
Now in case you find an attractive investment opportunity, you can simply withdraw the funds as and when required. The interest of the home loan would be applied on the remaining balance of the account. This gives the home loan borrower an opportunity to use the extra money as per his need and desires. State bank of India, Citibank and Standard Chartered Bank, HSBC and IDBI Bank are some of popular banks offering such a scheme.
I am seeking home loan for purchasing an under construction property. My bank is seeking an interim security. I thought home loans were offered with my new property as security. Why are they asking for an interim security?
As a security against a home loan, banks and NBFCs usually ask to mortgage the property to be financed. Normally the borrower needs to submit the title deed of the property with the bank as security for the loan. In your case since you are seeking a loan for an under construction property, the value of the property is lower than the sanctioned amount. Also, in purchase cases banks will get the new title deed in your name after registration, which will take 2-3 weeks time.
As far as banks are concerned, this is a risk for them. Even though the bank disburses the loan amount depending on the construction completion timeline, the bank is still at high risk since the security provided is less than the loan amount. To avoid such a high risk loan, banks seek interim security which is equal to or more than the loan amount. This can be anything from insurance policies to shares or another property of equal value without any encumbrances.
Wanted home loan against land deed
Loan against Land Deed is known as LAP or Loan Against Property. It is just like a personal loan, but the difference is that it is a secured loan. The process for sanctioning of Loan Against Property is just like sanctioning of a home loan or a personal loan. You will have to submit all income documents and if you are eligible for the applied amount, the loan will be sanctioned accordingly. Or else, the maximum possible loan as per your salary will be sanctioned.
As the next step, you will have to submit documents of the property mortgaging. The bank’s panel advocate will verify the legal documents to see if the title is clear and the property is free from any other encumbrances. Along with this, the bank will also initiate a technical evaluation to assess the property value. On completing these 2 processes, the loan will be disbursed as a single installment in your account. Loan Against property can be availed for any immediate finance requirement.
The idea behind Home Loan with a overdraft facility is to make use of your deposit in current or savings account to offset some part of the principal. Once a part of the principal is offset, your interest obligation comes down. Let’s understand this with an example.
Suppose Jagan, instead of paying Rs. 5 lakhs as prepayment, deposits Rs. 5 lakhs in his current or savings account which was linked to his home saver account and left it. His interest obligation would have been calculated not on the loan outstanding but on the loan outstanding minus Rs. 5 lakhs. What’s more? Jagan can withdraw this money or a part of it whenever he wants it. Let’s see how this works.
It can be clearly seen that the borrower has saved more than Rs 3,000 in the first month itself. This saving can be humongous if you consider the fact that you have to pay the EMI for the next several years.
What if you do not have Rs. 5 lakhs in your current/savings account? In that case, even when you deposit a recurring amount in your account, this deposit will be subtracted from principal outstanding to calculate the EMI. The savings would be less in initial months but will compound in the later part of the tenure. So, it’s your EMI that goes down and not your tenure. Many banks offer such a Home Loan facility including SBI and Axis Bank.
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