Raising cash

PERSONAL FINANCE

You can cut interest costs significantly by taking a loan against property.

The buyer profile of homes is changing fast. Five years ago, a typical homebuyer would be a 40-plus individual who, most probably, was making his first big home purchase. And maybe last too. However, things have changed since.

Now, the average home-buying age is down to 32 years or even less. That basically implies that this person is more likely to buy another home as his needs change in the coming years.

This has led to a boom in the property market as buying at a lower age allows individuals to borrow for longer tenor and increases the loan ticket size. But there is another story here as well.

Individuals, at a very early age, are getting into different kinds of loans. And it is always not backed by assets like a home loan. It could be a personal loan, credit card bills and others. And banks are beginning to realise that.

As a result, a large number of banks are offering options whereby you can use your assets to pay off your liabilities. For instance, HDFC has a product called "Asset Plus" that provides you loans against your self-owned property.

Says Renu Sud Karnad, Executive Director, HDFC, "Asset plus is aimed at assisting customers meet their immediate financial needs while they continue to occupy the property."

As far as the interest rates go, it is 13.25 per cent onwards for a time period of 15 years. Similarly, ICICI bank also has a similar product called "Loan Against Property" or LAP, where the interest rate charged is 13.50 per cent per annum.

So how do these products work? For starters, if you have bought a home through a home loan. And over the years the value of the home keeps has been rising.

Then, you can use this "increased value" of the property to garner a loan. The valuation of the property is going to be done by the technical teams of the respective banks. And accordingly, you will get the loan.

Financial planners say that such products can be used effectively to retire expensive debts. For instance, a personal loan would come at a over 16 per cent and credit cards, at over 33 per cent. And this loan comes at a good three to four percent less.

Also, most personal loans can be taken for a maximum tenor of five years whereas these loans can be taken for a 15-year period.

As financial planner Sajag Sanghavi puts it, "These loans can be used high net worth individuals to even invest in stocks or some other property where the returns would more than the interest rates being paid on the loan." In other words, such loans can be effectively used to unlock the underlying value of your property.