An Explainer: Hypothecation

In the world of banking, financial institutions often ask for collaterals while issuing loans. The legal process through which a borrower gives the rights of an asset to a borrower while maintaining ownership over the same is known as hypothecation. If you avail of a home loan, for instance, the house works as a hypothec, a term synonymous with lien and mortgage.  After the creation of hypothec, a buyer cannot sell the asset till he has fully repaid the loan. In cases where a hypothec is used to avail of the loan, interest rates are often cheaper as the said asset works as a security for lenders.

In case a borrower fails to honour the terms and conditions of the legal agreement, the lender will have the right to sell the asset and recover losses. This makes for secure lending as far as financial institutions are concerned.

After a borrower fully pays his loan, he must ask the bank to get the hypoethcation agreement terminated. Do remember that a lien of hypothec is registered in the local Registrar's Office and the property title transfer will not be clear till you get it withdrawn. This would mean the property is now legally yours and you do not owe the bank anything. Do not forget to take a letter from the bank stating the same.