Property investment : How to unlock its value?

Property investment _ How to unlock its value

Investment in a property can be highly profitable. But when you need cash to meet your unexpected expenditure  (like medical expenses or child education expenses) it may not be possible to sell it. Infact no one would like to sell their property to meet short term unexpected expenses.

Real life experience:

One of my friend is employed in an IT company, resides in his own house in Bangalore. The value of his ancestral property is around Rs 1.75 Crore. His parents are financially dependent on him and staying along with him. Five months back, his mother had undergone a major heart surgery. The total cost of the surgery was Rs 6 Lakhs. There was no medical insurance for his parents. He did not have sufficient emergency fund also. So, he had taken a personal loan of Rs 5 Lakhs to fund the medical expenses.

                                                     His situation is like being ASSET RICH but CASH POOR.

Were there any options available to him so that he could have unlocked the value of his self-occupied property? Are personal loans costly compared to these available options? Whether he still has better options? Let us understand about these options and find out how much money he can save in terms of interest payment.

What are Personal Loans?:

A personal loan is an unsecured (no collateral required) loan. It is a loan for a fixed amount to be paid back in equal installments over a fixed  time frame.

  • High interest rates are charged on personal loans
  • Offered for shorter tenure. Maximum tenure offered can be 5 years
  • No Tax benefits are applicable on these loans
  • A self-employed individual may find it difficult to get a personal loan

Different ways of unlocking the value of your Property to generate cash:

Now, let us understand about the ways in which you can unlock the value of your house to generate cash when needed.

1) Loan Against Property : This can be taken for following purposes

•Expanding your business
• Get your child married
• Send your child for higher studies
• Fund your dream vacation
• Fund Medical Treatments

Generally 50 to 60% of the current value of the property can be issued as a loan. Most of the financial institutions provide these loans for the tenure of upto 15 years.

2) Top-up home loan: These are offered to existing home loan borrowers of a bank.This loan can be used for any personal requirement (other than for speculative purposes). The tenure of the loans can be upto 20 years. The maximum loan amount can be upto 70% of the property value, minus the outstanding home loan. Interestingly, tax benefits (Section 24) can be availed on these loans.

3) Home Imporvement Loan: These loans can be taken for internal and external repairs of a house. This can also be used to extend the existing house. Up to 80% for extension and 100% of the cost of renovation can be sanctioned as a loan. The loan tenure can be upto 15 years.

4) Loan Against rent receivables: The loan amount can be used for any purpose. Loan is sanctioned based on the rent receivables of a property. Upto 75% of the net rent receivable over the lease period can be availed as a loan. The loan tenure generally depends on the lease period of the property.

5) Property Overdraft account: The loan amount can be used for any purpose. Upto 65% of the value of the property is given as a loan. But the loan tenure can not be more than 5 years.

6) Reverse Mortgage: These loans can be a boon for senior citizens (above 60 years age). In a typical mortgage, you borrow money in lump sum right at the beginning and then pay it back over a period of time using Equated Monthly Installments (EMIs).

In reverse mortgage, you pledge a property you already own (with no existing loan outstanding against it). The bank, in turn, gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse EMIs. Upto 70% of the current value of the property can be taken as a loan.

Average interest rates on these loans:

Property home loan options

The general terms and conditions on these loans are based on certain criteria like :

  • What is the quantum of loan required
  • Type of property – Residential or Commercial
  • Usage of the property – Self occupied or let out or vacant
  • Occupation of the applicant – Salaried or Self-employed

With reference to my friend’s case , how much money my friend can  save if he opts for a Loan Against Property instead of the personal loan?  Let us find out this by using the “Total Interest payable calculator“. You may alter the variables and analyze the results.

I have advised my friend to opt for a Loan Against Property and use the proceeds to prepay the personal loan account. (Always, check if there is any prepayment penalty applicable)

It is advisable to stay away from any kind of high cost loans. Best suggestion is to maintain an Emergency fund ( i.e., 3 to 6 times of your monthly expenses) as cash or near cash investments ( investments that can be converted into cash in less than 48 hours). You can use this emergency fund to tide over any unexpected expenditure.

Do you maintain emergency fund? Where do you invest it? Please share your views and comments.

(You may like visiting my post on “Best health insurance options for parents”)

About The Author

  • Ankit says:

    What could be the instruments to park emergency funds. should it be FD or could it be Mutual Funds. Is it ok to invest emergency funds in mutual funds. what should be the suggestible composition of the investment of emergency funds

    • Dear Ankit,
      The investment options for maintaining emergency fund can be cash, savings bank balance, FD, RD or liquid debt mutual funds.
      High priority should be given to safety of the capital and liquidity.

  • real estate in india says:

    You can definitely see your skills in the work you write.
    The arena hopes for even more passionate writers
    like you who aren’t afraid to mention how they believe.
    At all times follow your heart.

  • M.R.Adyanthaya says:

    Very convincing article to create an emergency fund.

  • Lokeshwara says:

    Informative! What is home equity loan then?

  • Ramchandra Prasad says:

    Sreekanth, do Indian banks offer Reverse Mortgage?

    • Sreekanth Reddy says:

      Ramchandra – Yes, most of the banks now provide reverse mortgage facility. Banks have so far sanctioned Rs 1,800 crore and disbursed Rs 800 crore under reverse mortgage loan since it’s launch in 2008. The payments received by the applicant under reverse mortgage are exempted from Income Tax.

  • Sowjanya says:

    Hi. Do i get tax benefits on the interest paid on Top-up home loans?

    • Sreekanth Reddy says:

      Sowjanya – Tax benefits (Section 24 of Income Tax Act) on interest paid on a Top-up home loan are available. But the condition is, the loan amount should be used for repair or renovation or construction activity of the home.

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