What are the advantages of taking a home equity loan?

Amit and Sonia are in their early fifties. Amit holds a mid-level corporate job while Sonia is a freelance lawyer. They have two grown-up children. The couple has not been able to save much so far. They own the house they live in but the home loan EMI will go on for seven more years. Bought for Rs 40 lakh around 15 years ago, the market value of the house is somewhere around Rs 1.5 crore now.

Besides, they have some mandatory PF corpus and a few mutual fund investments. Their elder son, an architect, wants to set up his own venture and Amit is keen to provide some seed capital. What should Amit and Sonia do? Should they draw from their existing corpus?

Amit and Sonia are in a typical middle class financial situation and find themselves short of funds for a lump sum need. Withdrawing from the PF account is not advisable because it is their primary savings for retirement. They will also lose interest on the corpus until they repay the loan. Loans, such as personal loans, will be expensive given the fact that they are unsecured and of a shorter tenor, both of which will imply higher EMIs that they can hardly afford with their earnings.
Amit and Sonia must consider how to leverage the asset they have created– their house. They can avail of a home equity loan, which is given against the appreciation in the market value of the property by the banks and housing finance companies. The loan is typically given on fully constructed property with clear title. They can take a home equity loan even when they have an outstanding home loan against the property. The lender will assess the current market value of the property and deduct the outstanding loan amount from this value. Around 50% to 60% of this net value will be the eligible loan amount.

Through this, Amit and Sonia will get access to a large amount of money at a good rate. The loan can be repaid over a period of up to 15 years, depending upon the retirement age. This will imply lower EMIs, which is very important to them in their current situation. There is no restriction on the purpose for which the loan can be used. Once their son’s business takes off, they might even be able to repay the loan faster. Using this would give the couple access to the funds they require at a reasonable rate and with the repayment terms that suits them, without disturbing their retirement corpus.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta)