One house for all loans

Your home is probably the most valuable asset in your portfolio. Here’s how you can use it like a veritable money machine.

By Rakesh Rai | Print Edition: September 6, 2007

You broke fixed deposits, emptied your provident fund account, sold off stocks and took a long-term loan to buy a house. All the trouble you went through has been handsomely rewarded. Real estate prices are today 2-3 times of what you paid about five years ago. Rejoice, for you are a real estate crorepati. For many homeowners, that is not the only reason to celebrate. Till now, there was no way one could earn from self-occupied property. But now there are several options to unlock the value of property.

One way is to take a loan (actually several loans) against the property. Banks offer such home mortgages. The interest rate is low compared to what is charged on other loans. That’s because the borrower has to deposit the property papers as collateral and gets up to 65% of the value. So, defaults are rare.

If you are still paying EMIs on your home loan, you can take a top-up loan. “Top-up loans are a powerful way to get more out of one’s property at lower interest rates,” says Ashish Mehrotra, business head (mortgages), Citibank. Mortgage-based loans are especially suited for self-employed and professionals who don’t easily get loans.

You can spend the money on anything—from your child’s education to a new car, from paying off high-cost loans to starting your own business. In fact, it is a good idea to consolidate all your outstanding debts (such as auto loans, credit card dues and personal loans) by refinancing them through a loan against your house. “If you can save a few per cent in interest rates, a home equity loan may be a compelling option,” says financial planner Rohit Sarin.

But don’t treat your house like a cheque book. It may be at a low cost but a mortgage loan is still a debt that needs to be repaid. If you have a huge highcost credit card debt, take a top-up loan only if you don’t plan to run up another fat bill the next month. That would only lead you into a debt trap.

Also, it is a good idea for a borrower to buy a term cover if he takes a big loan against property. That would protect his family from financial ruin if something happens to him.

8 ways to encash your house

Home Equity Loan

Purpose  Borrower can use money for anything—child’s education, medical costs, marriage, starting a business
Tenure Up to 15 years
Interest Rate 13-14%
Amount 50-65% of the current property value

Home Improvement Loan

For internal and external repairs and extension of existing home structure by adding a storey
Purpose Up to 20 years
Interest Rate 11-13%
Amount Up to 85% (for extension)
85-100% of the cost of renovation

Short-term Bridging Loan

Purpose Loan for the interim period between the sale of the old house and purchase of a new one
Tenure 2 years
Interest Rate 12-14%
Amount Up to 90% of the cost of new property

Property Overdraft Account

Purpose Not specified.The money can be used for any purpose at the discretion of the borrower
Tenure 5-10 years
Interest Rate 13-15%
Amount Up to 65% of the value of the property

Top-Up Home Loan

Purpose Not specified. Borrower can use for anything such as furnishing home,buying a car or retiring debt
Tenure Up to 20 years
Interest Rate S ame as home loan
Amount Up to 70% of property value minus outstanding loan

Home Con Version Loan

Purpose For acquiring another property by selling the present one. Existing loan can also be transferred
Tenure Up to 20 years
Interest Rates same as home loan
Amount Depending on the cost of new property

Loan against rent

Purpose Not specified. Borrower can use the money for any purpose
Tenure 3-5 years
Interest Rate 13.25-14.5%
Amount Up to 80% of the total rent receivable over the lease period

Reverse Mortgage

Option of monthly line of credit or lumpsum amount which can be used for any purpose
Tenure 10-15 years
Interest Rate 11-13.5%
Amount Up to 65% of the current property value

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