Go for en cashing home equity than personal loan

If you are planning of expanding your business then you can go for your encashing home equity.

For instance when Nishant Sheth, a textile entrepreneur, was considering of borrowing funds to expand his business; the first option that came to his mind was applying for a personal loan. But he thought over this and had almost approached a bank, when his father asked him to reconsider.

His father suggested mortgaging the house where Nishant lived; pointing out that a loan against property would work out to be cheaper than a personal loan. Nishant saw merit in his father’s words and decided to approach the bank for a loan against his property.

Knowing the benefits mortgaging the house like Nishant, many entrepreneurs are thinking of this option as returns on business are higher than the cost of a loan against property (also called home equity loans).

Explains My Financial Advisor director Amar Pandit: “Real estate prices have shot up and business owners are looking at en cashing a part of their home equity to fund a portion of their growth. This trend has emerged because of higher home prices, need for low cost funds, and to fund investment activity.”

More and more of the small entrepreneurs who have limited access to other means for credit are considering for this. Taking the cue, banks have started promoting their loan against property portfolio. Says Vivek Vig, country head, retail bank, Centurion Bank of Punjab: “It was a hidden asset. People are realizing that it can be leveraged to boost their business.”

The loan is sanctioned after valuation of the property, establishing the ownership and assessing the repayment capability. It is also subject to the minimum market value of the property specified by the bank. Typically, the loan amount could work out to 50-60% of the property’s market value (as determined by the bank).

Though the loan can be used for any purpose, but some banks encourage the borrowers to disclose the end-use. Speculative businesses are looked down upon. The repayment of the loans can be done in equated monthly installments (EMIs) and the repayment period could range from two years to 15 years.

The plus point of taking home equity loan is the lower rate of interest. “Loans against property are 30-40% cheaper than personal loans,” informs Mr Pandit. Rates on such loans are in the range of 12-15% pa. The banks offer lower rate of interest due to the presence of a security in the form of the borrower’s house, whereas personal loans do not involve any such collateral. Moreover loans against property are given for a longer tenure, while personal loans are for shorter tenures. Also, personal loans have a tenure limit and banks cannot sanction personal loans beyond that.

“The bank will not give you a personal loan of Rs 1 crore, but you can get this kind of money if your house is around Rs 1.75-2 crore,” adds Mr Pandit. “A loan against property involves no hassles and the bank’s interference is minimal,” says Mr Vig.

A borrower must check for prepayment penalties. “Most of these loans can be prepaid in part or full without any charges or subject to certain charges. This may vary and the borrowers should check this. Also, before opting for such a loan, it is advisable to check if there are alternative sources of borrowing like loans from family, loans against fixed deposits etc,” advises Mr Pandit.