Public and private sector banks and even housing finance companies offer loans against property, usually providing around 60% of the value of the property as loan.
If you are in need of a loan, home equity can become handy. It is loan against a property—residential or non-residential—having clear title. The loan can be taken for various needs such as children’s higher education, marriage or even buying a second property. In a home equity loan, the borrower uses the equity of his house as collateral.
Home equity loans are provided by public and private sector banks and even by housing finance companies. Banks usually offer around 60% of the actual value of the property as loan. However, the final approval of such a loan and the amount to be given will depend on the lender’s policy.
Calculation of home loan equity
The eligibility of home equity loan is calculated based on the current market value of the property minus any amount the borrower owes on it. The amount sanctioned will be the borrower’s equity. For banks, it is a secured loan as it gets the home as collateral.
The rate of interest for home equity loan is higher than a plain-vanilla home loan. However, the rates are much lower than other kinds of loan such as personal loan or credit card loan. One can repay the amount ranging from five years to 20 years, however, the earlier the loan is repaid, better it is.
The instalment on this loan is paid every month on top of the monthly instalment one already pays towards existing home loan. Unlike home loan which offers tax break of up to `2 lakh a year on interest payment and up to `1.5 lakh for principal repayment, a home equity loan does not offer any tax benefits on repayment.
Factors affecting home equity
The equity of a house varies from time to time depending on the real estate prices. As the real estate market depends on the economy’s growth rate, demand and supply situation and the prevailing interest rates, home equity will vary accordingly. At the current stage, when home prices are stagnant and inventories piling up, home equity will not improve much, especially if the house has been bought in the last seven to ten years.
Location advantages such schools, hospitals, industries, highways and public transport facilities also help in augmenting home equity. The owner must ensure that the house is in good condition and all fittings are in place. Investments done in renovation of the house will help in getting higher value and raise the equity of the flat. Also, the owner must ensure that all bills, including house tax, are paid and there is no dispute over the property.
For home equity loans, banks can give the money as lump sum, where the borrower will get the loan entire amount as lump sum. The other option is when the bank will sanction the loan in parts depending on the borrower’s needs.
The borrower will make the repayment every month. One can also make partial repayments of the principal amount depending on the surplus liquidity. Banks do not charge any pre-payment penalty on floating loan and the minimum amount of prepayment has to at least two months of EMI. A borrower should start prepaying some amount from the first year of the loan. Prepaying later does not save much in terms of interest payment. Stepping up the EMI also helps to reduce the total interest outgo in the long run. Increasing EMI is an effective way to make sure the loan is paid out early. Increase in EMI can be requested at any point of time during the loan and there are no charges for such a request. The borrower will have to give a fresh ECS mandate to the bank for the new EMI.
Both salaried individuals and self employed can avail home equity loan. The borrower will have to provide identity and residence proof, six months’ salary slips for salaried individuals, balance sheet and profit and loss account for two years for self employed individuals, income tax returns for two years, bank statement for last six months and the application form.
For the property, documents like registration deed, completion certificate, occupancy certificate, building approval plan, valuation report from bank’s approved valuer and latest property tax paid receipt will have to be submitted along with application form and processing fees. So, home equity loan can be beneficial to an individual because of the ease of getting the loan.