Soaring property rates can frustrate your home dreams. Use a top-up loan to sail through
Buying a house is a crucial financial decision for most people. But in cities such as Mumbai, which has seen a spurt in real estate prices, the financial viability factor is a big question even if someone desperately wants to buy a home.
LOANS AGAINST INSURANCE OR INVESTMENTS
If you have an LIC policy which has acquired surrender value, then borrow directly from LIC against that insurance policy. A borrower can repay the loan at his convenience or the insurer adjusts both the principal and the interest at the policy's maturity. The maximum loan amount available under the policy is 90% of the surrender value (or 85% in case of paid-up policies) including the cash value of bonus. The rate of interest charged on loans is at 9% to be paid half-yearly. The minimum period for which a loan can be granted is six months from the date of its payment. In case the policy becomes a claim either by maturity or death within six months from the date of loan, interest will be charged only up to the date of maturity/death.
You can borrow against your PPF investments from the third year of the investment. Similarly, you can borrow against your mutual funds investments and ELSS (only after the three-year lock-in period is over). The interest rate on these loans is in the range of 11-13%. You cannot borrow against ELSS in the-lock in period as per existing stipulations. You can opt for partial liquidation of units, but it shouldn't affect the goal for which you are investing. Ensure you reinvest in future if you are drawing down funds from your investments.
LOANS AGAINST GOLD
Loans against gold are cheaper and better substitutes to personal loan due to lower interest rates. For one, the interest rates on personal loans are not standardised. They vary from bank to bank and within the bank, it depends on a host of factors including the borrower's salary, profession and purpose of loan.
For instance, the interest rate on a personal loan of 5 lakh falls in a wide range of 15-30%. But the loans against gold are available for as low as 11%. Any day a secured loan such as loans against gold, investments or property is cheaper because they are backed by some assets. Also, within the gamut of secured loans, loans against gold have their own advantages. Being a secured loan, the risk of default and credit losses is significantly lower in this loan compared to other forms of loan for personal use. Given the lower risk, gold loans come at a lower cost than other forms of personal loans. Moreover, you get higher loans against your gold compared to loans against securities, managing director, Optima Money Managers. For loans against securities, you can get a loan of only up to 50% of the value of your shares or your equity mutual funds. You can consider loan against property only when you need a big amount as it doesn't make financial sense to mortgage your big property.
So if the value of your shares is 1 lakh, you are likely to get a loan of only up to 50,000 against them. In case of gold loans this proportion is greater. Banks and NBFCs such as Muthoot Finance, Muthoot Pappachan Group, Manappuram Finance are active players in this loan segment. Banks usually lend against gold ornaments but NBFCs offer loans against gold ornaments, coins and bars. Once you pledge the gold, you would get a loan amount of 70-95% of its value. The bank/NBFC keeps the gold in its possession until you pay off the dues.
The gold jewellery is sealed in a tamper-proof manner in front of the customer and kept in the bank's safe deposit. In fact, the Reserve Bank of India (RBI) has introduced specific guidelines and standard practices for bank lockers. The maximum tenure for these loans is three years and the interest rate falls in the range of 11-20%. The customer needs to come to the branch to collect the jewellery. The process is simple and delivery of jewels is done across the table at the branch on repayment of the dues.
LOANS AGAINST PROPERTY
The assumption here is that you have another house, which you do not want to sell. You can borrow up to 50% of that property's value and the rates vary in the range of 12-15%. But a loan against property is a time-consuming process. "A bank has to survey the property, look at title deeds and other crucial documents to ensure the property is free from encumbrance
You can consider loan against property if you need a big amount as it doesn't make financial sense to mortgage your big property for small loan more over you will not get loan against the property which is already mortgaged and there is outstanding balance against the loan raised for buying the property.
If you plan to sell the property but have not identified a potential buyer, then you can opt for a bridge loan and make a down payment and buy your new house. This loan comes in handy when you do not want to take a long term home loan, by giving you enough time to sell your existing property to pay off the loan.
However, it is mandatory for you to identify the new house. If the borrower is unable to find a buyer for the old flat within the stipulated period, which is usually six to 12 months, the lending entity has the option to convert the bridge loan into a mortgage loan. But remember, the house in which you live is not considered to be an asset. Buying a bigger house and building corpus for your child education both are different goals and you should not stop your investment for your child's education because you pay a higher EMI on account of top-up loan. In other words, higher EMIs due to a top-up loan should not impact your investment planning and hamper your other financial goals. So borrow sensibly.
