Tag: Loan

What are the different types of loans you can take in India ? Do you always think about Personal loan when you want a loan? A lot of people despite having different kind of assets go for personal loan even if they have other options where they can mortgage an existing asset and take a loan at lower interest rate. In this article I will give you 5 alternatives to personal loans and tell you a little bit about each.

Before we move forward let us understand a basic rule of lending. There are two kind of loans , Secured Loan and Unsecured Loan. Secured loan is a loan where a lender has access to some kind of asset so that incase you run away, he can liquidate the asset and take his full or partial money back, as there is a sense of security in secured loans, you have to pay a lower rate of interest on these loans. However an Unsecured loan is a loan where the lender has no access to any asset and incase you run away, bank has no way to get back that loan , that’s the reason you have to pay very high interest rates on these loans, Personal loan and credit card are examples of these loans. The biggest reason why someone should go for these alternative loans is that the processing of these loans are much faster and better interest rates compared to a personal loan. So now lets see some alternatives to personal loan incase you posses an asset.

1. Loan against Gold

Lets me start with the best option to take a secured loan in India. You can pledge your Gold jewellery and take a loan from Banks and companies like Muthoot Finance or Mannapuram Gold. The best thing about gold loan is that the processing is extremely fast (from few hours to 2-3 days) depending on your case. The way it works in Gold loan is like this – The higher the margin of safety you leave , the lower the interest rate. Here is an example , if you have gold worth Rs 10 lacs and you are ready to pledge it for a loan of just 5 lacs, then you are leaving a comfortable margin of Rs 5 lacs for Bank (incase you run away or gold prices decline) . So in this case you will get a very good interest rate offer , but if you take a loan which is 80% or 90% of the worth , then you will be asked for a very high interest rate. Generally the interest rate asked is between 12% – 15% .

There are no pre-processing charges or too much documentation involved in gold loan, in most of the cases the only thing required is your address and id proof. that’s all and you can get a loan within 24 hours easily .

2. Loan against your Insurance Policies (LIC/SBI)

Lets talk about LIC policies here. You can also get a loan on your LIC policy incase its eligible for loan (most of them are) . But to get loan on your LIC policy, it should have a SURRENDER VALUE, which happens only after payment of 3 yearly premiums. Only after that you can avail for a loan which would be around 90% of Surrender Value. Lets see an example – Ajay has a LIC endowment policy which has a yearly premium of Rs 50,000 . He has paid 10 years premium (total 5 lac) , the surrender value of his LIC policy is around 3 lacs at the moment. So he can get a loan of around 2.7 lacs.

One can take a loan either from LIC itself (recommended) or from banks, for which they will have to pledge their LIC policy totally to them. So incase they are not able to pay the loan, their LIC policy will be surrendered and company will take their money back. The best part of these loans is that you get it only at an interest rate of 9-10%. So if you have a LIC policy and it has a respectable Surrender Value , then you can take Loan against these policies and not take personal loan which has hefty interest rates. Check the loan amount available on your LIC policy by just sending this SMS – ASKLIC YOUR-POLICY-NUMBER LOAN to 56677

3. Loan against Fixed deposits

Incase you have a Fixed Deposit for long-term and would not like to break it in times of emergency, you always have an option to take a loan against that Fixed Deposit. The interest rate you will have to pay on that loan should be 1-2% higher than the interest rate earned on the FD and the loan amount available to you would be around 75% – 80% of the FD current Worth. For an example – suppose you have a FD which has its current worth at 10 lacs and you are earning 10% on that FD , then you can get around 8 lacs of loan at 12% interest rate . This is one good option incase you do not want to break the FD and also want to take a loan.

4. Loan against Property

You can also take loan against your property (Residential and Commercial) . Banks give loan upto 50% of market value of the property or 30-40 times your monthly income . The interest rate charges is in range of 13-16% depending on how big the loan is and how much margin you can leave. Loan against property is generally recommended for those who want a big amount as loan for purposes like expansion of business, wedding or some big-ticket expenses. Incase you need just 2-3 lacs of loan then it’s not recommended.

There can be processing and prepayment charges in these loan against properties (LAP) . A good place to compare the loans against property is policybazaar page . Public sectors banks like Bank of Baroda, SBI banks are known to not charge the prepayment penalties and have lower processing charges . All the loans against property comes at FIXED interest rates.

5. Loan against Other investments

Shares and Mutual Funds – There are loans offered against Mutual Funds and Shares , but there is a list of approved Funds and Shares which can get loan, also as the values of shares and mutual funds are highly volatile, there is high level of margin required on it , Means that if you have shares worth Rs 10 lacs , the amount of loan you can get is much lower than 10 lacs.

Public Provident Fund – You can get loan on your PPF account also , but there are some restrictions , you can only get loan from the 3rd year to the 6th year and the amount of loan will be only 25% of the balance in the account 2 yrs back . For example – If you want to take the loan in 5th year after opening your PPF account , then you will only get loan of 25% of the balance in 3rd year , if the balance was just Rs 2,00,00 in 3rd year, then you can only take loan of Rs 50,000 .

So I hope you have got a clear understanding of what options do you have incase you want to take loan against your assets. Note that the lower interest rates are one of the reasons why you should go for these alternative loans, but the bigger reason can be fast processing of these loans in case of emergencies.

Can you claim a tax deduction for your under-constructed house? Can you claim tax for the home loan taken from your friend and not from Bank? These are some of the questions which are not generally discussed over and a lot of investors have no idea about actual rules. In the video below I will talk about four not so known rules of home loans. Keep reading. Readers on email can watch the video on this article.

1. Tax deductions for House under-construction

Can you claim tax benefits for home loan taken for under-construction house? A lot of investors assume that they can claim tax deductions and without doing much research, they go ahead with the loan. However, they should know the fact that claiming tax in the case of the under-construction houses is different. You cannot claim the tax deductions for the principal amount for the under-construction house. You need to have possession and certificate of ownership to claim tax under 80C. However, the Interest part is a little different. You can not claim the interest amount unless you get the possession of the house. However, you can always claim the deductions later in 5 equal installments for the next 5 yrs from the end of the financial year of possession.

Example : Suppose Ajay bought a house on loan on 5th June 2010 and he pays total 4 lacs as interest in next 2.5 yrs and gets possession on 7th Nov 2012 . He will be able to claim this 4 lacs Rs in equity installments in the next 5 yrs period , which is 80,000 per year in 2013 – 2017 . However the total limit for exemption will still be 1.5 lacs per year.

2. Selling the House before 5 yrs reverses the tax saved earlier

We think of saving tax, but once the tax is saved for a particular year, it does not mean the story ends here. The tax benefit under sec 80C is allowed for home loans considering the condition that it won’t be sold before 5 yrs from the date of purchase. Read some nice tips for house buying from real buyers

If you sell your house before the expiry of 5 yrs, all the money you saved under sec 80C in earlier years will be deemed to be your income in the year of sale and added to your salary. For example, if you bought the flat in Oct 2010 and in the next 4 yrs you saved 1 lac in tax under sec 80C, then this 1 lac will become your income in the year of sale and will be taxed. However, the interest component once saved is saved and it won’t be reversed.

The tax benefit under section 80c is allowed subject to the condition that house property should not be sold before a period of 5 years. If you sell the house before the expiry of five years from the end of the financial year in which you obtained the possession, the deduction will be discontinued and the entire tax deduction claimed in earlier years under section 80c – for repayment of principal component of the home loan – will be deemed to be your income (in addition to capital gains) in the year in which you sell the property. However, the housing loan interest deduction claimed under section 24(b) won’t be reversed.

3. A loan taken from Friends and Family is eligible for Deductions (Interest)

In case you want to take a loan from your friends, parents or any other person, you can still claim the interest on the loan under sec 24, which is up to 1.5 lacs per year. However you can not claim the principal amount under sec 80C, that’s applicable only if you take up the loan from some bank or financial institution. So you don’t always need to take the loan from Bank. if you can take it from a friend or family, you can still claim tax deductions on the Interest part.

4. 80C is not allowed for loans taken for Extension or Renovation of House

If you take a loan for extension or renovation of your existing house, in that case, you can not claim the principal part under sec 80C, but you will be able to claim interest amount under sec 24, but the limit, in this case, is only up to Rs 30,000 for self-occupied properties. However, for houses which are let-out (a rented or second home which is not occupied), there is no limit for a tax deduction.

Comments? Which one of above 4 facts you didn’t knew about?

What is Reverse Mortgage ?

Simple! Reverse Mortgage is the exact opposite of a Home Loan. Anyone, who has a fully owned House can get a loan. The way, this works, is that his loan money will be divided in chunks (EMI’s) over many years and given to him every month. This can easily act as Monthly income. At the end of the loan tenure, the Bank stops paying the monthly income. If one of the spouses dies, the other can still continue living in the house. If both die, the bank gives their heirs two options – settle the overall outstanding loan and retain the house or, the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs. For people who don’t know – “Mortgage” means “Loan” 🙂

How is the loan paid ?

With a reverse home mortgage, no payments are made during the life of the borrower(s). Which means the loan has to be paid only after both the borrower and spouse die.  Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas, where the appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.

When both, the borrower and spouse pass away, the ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remains. Read about Real Estate returns over last 10 yrs .

Example :

Mr Ajay is around 62 yrs old, and his wife is 60 yrs old, they live and own a house in Karvenagar, Pune which is worth Rs 1 crore now . They have a daughter and son who are their legal heirs (50:50) . The old aged Ajay and his wife do not have a monthly income source, so they decide to go in for a Reverse Mortgage loan. The Bank is ready to loan upto 60 lacs to them, which means they will be paid Rs 35k per month for next 15 yrs (just an example.)

Now, they start getting monthly income of 35k per month for next 15 yrs, & they continue to live in the same home. After this point, their children support them financially and then Ajay dies at age 79. After this, his wife still continues to live in the house. Sadly she too, passes away at age 85. By this time the total loan outstanding becomes Rs 1.1 crores (It was 60 lacs at the end of 15 yrs, but after that, it starts growing.)

Now the loan has to be paid off. The son and daughter does not have money to pay to the bank, so the bank decides to sell off the property. At that time, the price of the house is Rs. 3 crores. The bank sells the house and get total 3 crores, out of which 1.1 crores is taken by the bank and rest is paid to legal heirs, which they split amongst themselves. Look at EMI Calculator

Which Banks Offer Reverse Mortgage ?

• National Housing Bank (NHB)
• Dewan Housing Finance Limited (DHFL)
• State Bank of India (SBI)
• Punjab National Bank (PNB)
• Indian Bank
• Central Bank of India
• LlC Housing Finance
• Andhra Bank
• Corporation Bank
• Canara Bank.

Tip from Hemant : “Star Union Dai-ichi offers annuity cover with reverse mortgage . When a person approaches the bank for a reverse mortgage loan on house property, the bank, after assessing the value of the property and sanctioning the loan, will approach the insurer and buy an annuity plan for the borrower. The annuity will be passed on to the borrower’s account on a monthly, quarterly or annual basis. The installments will depend on the purchase price, age and whether the insured person opts for a lower or higher lifetime annuity. “

Important Points in Reverse Mortgage

• Reverse Mortgage is available to Senior Citizens only. Any house owner over 60 years of age is eligible for a reverse mortgage. If wife is a co-applicant, she  should be above 58.
• The maximum loan is up to 60 per cent of the value of the residential property subject to maximum of Rs 50 Lacs.
• The maximum period of property mortgage is 15 years with a bank or a HFC (housing finance company.) Minimum tenure will be 10 years. Some banks like Punjab National Bank offer RML for 20 years also.
• The borrower can opt for monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
• The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.
• The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability. How to do last moment Tax Planning ?
• Reverse mortgage rates will vary according to market conditions depending on the wheather borrower has choosen Fixed or Floating interest rate.
• Processing fee for the loan would be between 0.15 per cent and 1.50 per cent of the loan amount.
• One can prepay the loan along with the interest any time during the loan tenure. Typically, there is no pre-payment penalty.

How do I apply for Reverse Mortgage?

• Decide to pledge your house for reverse mortgage.
• Go to the branch of the bank, who you have a banking relationship with, and provides Reverse Mortgage
• Fill up the necessary form, the bank offers for reverse mortgage
• You need to furnish your personal and financial details like: the property, your legal heirs, and so on.
• Proof of ownership; you will also need to furnish property papers and a proof that the house that you are pledging is your residence.

When to consider taking Reverse Mortgage ?

Even though Reverse Mortgage seems like a nice idea, it should not be the primary tool to fund one’s retirement expenses. It shouldn’t be used to fund the shortfall in the retirement income if any. A valid reason can be – if one does not have any legal heirs or leaving money to/for them after death, is not high priority. There are many old people who have assets of high worth, but they do not have a proper, steady stream of income. One can use reverse mortgage in that case. In India, Reverse mortgage isn’t very popular yet, because of bad/negligible marketing and our mentality, where we dont take loan on our most valuable and most emotional asset “Home” 🙂 Another reason could also be that there are old / aged people who own 100% of home and are living alone with spouse are few & far between. These products might become very popular in coming decades .

Comments? What do you feel about Reverse Mortgage Products? Do you think it’ll become more popular & successful in the coming decades?