Number of View: 13846

Lucky are those who are flush of liquidity with money stuffed in their bank accounts. Perhaps they don’t realise the idle fire power in their bank accounts which many would be dying to have. So many people either end up taking wrong financial decisions by either selling their revenue earning assets or taking up costly financial help just to raise short to long term loans to fund their investment or consumption requirements. The after maths of these decisions are multi dimensions, to name a few :
BFA Repossession– Selling off an existing assets / investments at harsh valuations to raise up instant liquidity. Remember that if you want instant liquidity on your investments, the chances of you getting a fair price for them is remote. For example, selling your real estate at a discounted value or selling your stocks / mutual funds at poor value.

Tax Nightmares – How many of you care of tax impact when you need liquidity ? The impact can eat any where from 0-30% of your asset value. For example, selling your mutual funds before 1 year can result in 15% tax on your gains. Or selling your real estate before 3 years could end you paying 30% tax on the gains (if you end up having one).

– Financial Damage – Selling one asset for buying another asset is not a good idea in a lot of cases, unless your existing asset has been wrong investment decision. I at times call it selling your mum’s jewels to buy jewels for your wife (or vice-versa) ! This also ends up denting your financial plan which you may have been following for several years towards your goal. I have so often seen people investing for years into a retirement pot like PPF or mutual funds which gets an axe to fund their other investment decisions. Unfortunately some of these pots can not be re-filled instantly or you could end up paying more to fill the same level of your pot.
Perhaps this is enough of an introduction trying to justify that knowing different sources of funding is really helpful as it may help in furthering your investment objective without axing your existing net worth. This article is going to enumerate of a few of such options which you may want to utilise depending upon your requirement.

Before we start going into each of the funding options available at your disposal, I have summarised each of these options and their relative colour score for each of the category.

For Interest Costs, a Green indicates reasonable interest rate cost, Orange indicates high interest rate and Red indicates very high interest cost.

For Ease of ObtainingGreen indicates that a loan is easy to obtain, Orange means a bit tedious to obtain and Red means – different to obtain & involving a lot of paper work.

For Quantity of Funding – Green indicates that a large amount of loan can be obtained as loan, Orange means medium amount of funding can be obtained and Red means low level of funding can be obtained.

Heatmap - funding

 

Housing LoanHousing Loan, Mortgage, Reverse mortgage, Re-mortgage
Most of the times your requirement for funding is to support a decision to buy a property and it is very commonly known that the best way to finance your residential property decisions is via a Mortgage or commonly known – Home Loan. Banks are happy to give this form of funding subject to a few boundaries such as :

  • Between 80 to 85% of the value of property (also called Loan to Value). So if you want to buy a property worth 50 lacs, banks can provide a home loan upto 42.5 lacs.
  • Your earning potential – Different banks have different criteria and banks are restricted in their loan decisions to fund only upto x times of your annual income. This x can be any where from 5-20 times of your income and depending upon the respective banks. And unfortunately this is calculation is based upon your income declared in your annual income tax returns.
  • Type of property – banks don’t fund every type of property, specially when it comes to disputed title, flats, etc. Hence your property should be within the eligible types of properties which it can sponsor.

Interest rates on housing loan are amongst the lowest you can get. At the time of writing this article, they are around 10-12%. As the interest rates in the economy move, they can be any where from 8% to 14%. To a person outside India it would sound a rip-off as mortgage rates in Western Countries are between 2-5%, but unfortunately India doesn’t have that luxury.

Paper work – Home loans may not be very easy to get as the banks need to do a lot of due diligence on the property, income affordability, obtaining a charge on the property and legal paper work. Hence at times it may take from a couple of weeks to several months before your loan gets sanctioned and disbursed.

 

Remortgage / Re-finance of Home Loan
Not many people know about this type of financing facility. People are aware that they can take a home loan to purchase a property. However, you can also obtain a loan against your existing property of which you are already an owner. Hence this option is called Remortgage or Re-finance of Home. By using this mode of finance you can arrange large amount of liquidity against your illiquid residential properties at low levels of interest rates.

The criteria applicable for Home loan as mentioned in first option are exactly applicable for Re-mortgage. The interest rates can be same or slightly higher than home loans (between 0.5-1% more than home loan) – again it depends upon the lending banks.

 

Loans Against Fixed Deposits
Transparent Piggy BankThis is yet another unexplored area where cheap finance can be raised on a short notice. If you look at it, your balances lying in your Fixed Deposits are essentially your money which you can’t access till its maturity or without breaking the deposit account. Loan against FDs effectively works like an overdraft account which is secured against your FD balances. Banks can provide upto 90% loan on the FD amount as an OD facility which can be withdrawn at no notice. Interest is charged only on the withdrawn amount. For example, if you have FD’s worth Rs. 30 lacs, you can get OD against this FD balance for upto 27 lacs. If you don’t withdrawn any amount, no interest will be charged. If you withdraw only 5 lacs of the available 27 lacs, bank will charge interest on only 5 lacs. If you repay back Rs. 5 lacs after a month, the interest will be charged only for a month and you can again have the entire 27 lacs at your disposal when needed. Even if you want to use it for a couple of months / years, all what you need is to pay the monthly interest amount to the bank.

The interest rate charged by the banks is generally between 0.5% – 1% higher than your FD rate. For example, if your FDs are attracting 9% interest, the OD shall rate shall be between 9.5%-10%. Another advantage of this facility is that there would be no processing charges payable by the borrower, which saves you another 0.5%-1% of the loan amount. So this may be even cheaper than a home loans and can be a very effective financing option for all NRIs who have stashed millions of rupees in their NRE Fixed Deposits.

 

Loan against Securities
If you have stocks / mutual funds, you do not need to sell them in order to get liquidity. Banks provide loan facility against your stocks and mutual funds. You can pledge your holdings to the bank and against that the bank will provide you an OD facility. The type of securities against which you can generally avail such kind of credit facility are shares held in demat form, mutual fund units, Exchange Traded Funds (ETFs) and Insurance Policies.
Unlike loan against FDs, banks would generally charge a processing fees along with an annual fees to renew the OD. Also the interest rate will vary based upon type of security. Generally you can expect the bank to charge around Base Rate plus 3-6%. The base rate at time of writing this article is around 9.5-10%. So in effect you can expect anywhere between 14%-16% interest rate being charged against your securities.

 

Loan against Gold
Gold JewelleryIndians love investing in Gold – which can be in the form form of gold jewellery or buying physical gold coins or bars. Our trust in gold has been passed on from generations and is difficult to be uprooted. The only disadvantage is that this gold gets passed on from one generation to another and is rarely be sold. Hence any capital invested in the asset along with capital gains there on are just notional as they will never be monetised. Gold loans tend to ease this problem by providing credit facility upto 70-80% on the value of gold. Again this facility can be obtained in the form of an Overdraft account secured by your gold holdings. You need to take your gold jewellery / coins to the respective bank who would perform its valuation and subsequently accept it as a pledge. The processing fees on such loans can be around 1-1.5% of the value of the desired loan. Interest rate is slightly cheaper than loan against securities and could cost between 13-16%. Beware before you contact any gold finance companies (non Banks) – they would charge over 20% interest against your gold !

 

Loan against PPF

This mode of obtaining a loan is a bit lower in my priority, but it is good to know that it exists. A lot of restrictions exists around this and the key ones are :
1. You can get a loan after the end of first fiscal year when you started your PPF account and before 5 fiscal years. For example, if you opened your PPF account in Dec 2011, you cannot obtain a loan against your PPF balance before March 2013. Further, you can only obtain a loan upto 2017.
2. The amount of loan can not exceed more than 25% of the balance of the last fiscal year.
3. Interest rate is 2% over the PPF rate. Currently this will be 10.6%
4. You need to repay the principal within 36 months and interest due on the amount within next 2 months after the end of 36 months. If you don’t do this, the interest rate will increase by 4% to 14.6%.
I believe that the maximum amount which you possibly borrow from a PPF account owing to such restrictions can not be large. Even if you deposit 1 lac each year, the max you can draw as a loan will never be more than 1 – 1.5 lacs in total.

 

Personal Loan
If all of my modes of financing have been exhausted, I would perhaps looks towards financing via Personal Loan from a bank. Caution – this option is amongst the most expensive option and in most cases charges a prepayment penalty in case you want to settle this loan early. The interest rate offered by banks depends upon the credit worthiness of the borrower and can range from any where between 18% to 50%. This form of financing is not secured on any of your assets and is provided very rapidly by the banks. But again, beggars can’t be choosers. If you really need funding and you don’t have other options, then this is the option which may come handy. But before that do not forget that an equally competitive loan source can be your credit card !

 

Credit Cards
Credit Card photoThis option is not very commonly used in India as credit cards have not penetrated deep into Indian consumer’s hand. To some extent I might call it good considering it has burnt a lot of people who have used it incorrectly without knowing the fine prints. Credit cards offer an individual ready access to cash upto the cash withdrawal limits. Your limit can vary from one bank to another and can be between 50-80% of your overall credit card limit. The interest charged on credit cards is between 2-5% monthly. On an annual basis this is a whopping 24-60%. However, this facility can come up very handy where you may need cash for just a couple of days to bridge your funding gap. However, never aim to use this form of funding for over a couple of months as it would dent your finances very adversely owing to hefty interest charges.

 

Conclusion

Among all the options which I have mentioned in this article, you should evaluate your personal circumstances and choose the one which is most appropriate to suit your needs. Try to go with the secured loan options such as Home Loan or Loan against FDs (if you have FDs) which will take some time before getting sanctioned, but they will cost you less. Unsecured loans such as Personal loans and credit cards can cost as much as the lender wants. Hence avoid such financing options unless you are really stretched. In the end, no loan is a good loan – you may also enjoy reading our article Good Loan & Bad Loan.

Related Posts:

32 Responses to Different Options to Raise Funding

  1. praveen says:

    sir,
    i own a flat(no loan or anything on this – all paid off ) in chennai and wanted to buy another flat..i decided to mortgage my first flat to generate some cash flow.
    i applied it with SBI and my application was rejected since i mentioned that this mortgage is for buying another property..the bank manager told me that they generally dont provide mortgage for buying another property..is this true.?
    if it indeed true..what are the acceptable reasons for taking a mortgage loan..i dont want to commit this mistake again.

  2. renuka says:

    sir,

    i took a home loan last year with IOB for 43 lacs..nri home loan.10 yr tenure
    and i was given a monthly equated EMI of around – 42000 Rs

    at times, i make lump sum payments …of additional 2-3lakhs.
    but inspite of making this lump sum payments, i still see the EMI to the same.
    from some of your posts here, i could understand this is more like reducing the tenure method..

    but then.what options do i have to reduce the EMI instead of the tenure..and how should i approach in getting this changed to reduce EMIs amount.

    so, does equated EMI all work only this way..

  3. sherin says:

    dear sir,

    i bought a NRI loan with SBI..when i was working abroad. loan amount is 40 loacs and it is a home loan

    now i returned back to india for good and took up an employment here.

    i understand when i applied for NRI loan i had few restrictions like only 10yr tenure for NRI etc etc.

    now, i would like to know the following:

    1. inorder to convert this loan to a resident home loan,what is the process i need to follow..
    is there a fee for it
    2. i heard, if i convert this to a resident home loan,then i will have restrictions/limitations on lump/part sum payments on a given year. means, no limitation on the part payment that a NRI can do where as it is not the same residents.
    3. if i make lump/part sum payments as a resident and close the loan earlier, then i will have tax implications and be under the tax dept scanner..is that all true.

    basically, i would like to know by converting this NRI home loan to a resident loan, what are the benefits i would lose.

  4. Praveen,
    Mortgage is provided against the property which you are buying. If you already own a property and you want to take a loan against it, it is classified as a secured borrowing under ‘Loan Against Property’ or LAP. Interest rate of LAP is higher than Housing Loan as the LAP can be utilised against any purpose while Housing loan can only be used for purchase of the respective property.

  5. Hi Renuka,
    Unfortunately for this you should contact your Bank. Not all banks may provide this option and would rather reduce the EMIs than decrease the EMI amount for the same tenure.

  6. Sherin,
    The policies vary from one bank to another. However I won’t say that resident loan accounts are more restrictive than others. You can now close your complete loan account in one go without any prepayment penalty. Most of the resident loans can be paid upto 25% per year, which in my opinion is a good limit.

    To convert your loan status, you would need to approach the bank which will then re-assess your payment capacity. You would be subject to resident interest rates which are same as NRI interest rates for most cases.

  7. deepak says:

    sir,

    please clarify me on the following:

    i took a sbi max gain nri home loan last year ,in august, for a under construction flat..
    at that time i was given a holiday period for 1 yr…
    so, in that case – i was paying an interest only payment of around 15k for a 25 lakhs loan/month..

    now, i would like to know ,what happens after my holiday period ends – how much my principal component will be –

    also is it possible for me to extend my holiday period for one more year –

  8. caleb says:

    sir,
    first of all -thanks to your useful posts here.
    i am looking to purchase a residential property ..this is my first time going for a home loan. i work in a corporate company and always had many private banks approaching us for home loans.
    but i always heard it s best to go for home loans with nationalized bank since it is always reliable than private banks and they have lot of scrutinies being done…which is good for us…but what is your take on this..and what benefit and safety do you see with going for home loans with nationalized banks compared to private banks.. i dont know how far this is true or is it just a myth..as i understand all types of banks needs to abide by certain RBI rules.

  9. Deepak,
    holiday period is a promotion which a bank may provide. During the holiday period you don’t pay any principal. Hence after end of the holiday period your principal will be same as before the start of the holiday period.

  10. I would classify it as a myth. I would go to a bank which offers me the best interest rates with lowest charges. Things to watchout are :
    1. Interest rate
    2. Prepayment penalty
    3. Upfront processing fees
    4. Any other fees can charges.

    I would think that private banks will do more checks than public banks and hence it should not be a matter of consideration.

  11. swetha says:

    sir,

    wanted to go for a home loan -with floating rate –

    when ever we are on a floating rate in the home loan, and if there is any change from the RBI be it increase or decrease in the interest rate, does the banks apply these rates immediately to be effective or what is the time frame given to the banks to use these changed rates.

    is it true that nationalzied banks makes changes immediately compared to private banks especially if there is a decrease in the interest rate.

  12. Swetha,
    Even if you go for fixed rate loans, the banks fix the interest for 2-5 years only. In the current economic climate, the interest rates would rather go down than to go up. Public sector banks generally reduce interest rates owing to government pressures. The banks do not end up reducing the interest rates immediately after RBI changes its rates. Each bank has its own internal interest rate structure and they are correlated with RBI’s interest rates. There could be a time lag of one to several months before the banks start to act upon RBI’s rate reduction.

  13. ravi says:

    sir,
    i recently went for a gold loan with sbi –
    sbi charged be 1% as the processing fee .
    but then they also collected RS 500 from me in cash, to pay the goldsmith that they had
    called in for to check the purity of our golds..is this additional 500 acceptable..and
    why are they not part of the the initial 1% processing fee that i had already paid

    ———–
    in another instance.i had taken a home loan with sbi for purchasing an under construction flat a year ago ..they had charged me 0.5% at the time of loan processing..but then ,recently,they had charged me 500Rs in my loan account stating those are for some legal fee to check the sale deed documents.

    are these intermittent service charges acceptable – should i take up this matter to report..

  14. Ravi,
    For Gold loans, perhaps the Rs. 500 should be valuation fees. However, I would have thought that they should be included in the 1% charges. Similarly for the charges on the home loan. You should definitely raise it as a complaint and ask from them the basis of these charges.

  15. sundaram says:

    sir,
    i had purchaed a car for my dad when i was in india last year – through sbi car loan.
    it is worth about 10lakhs…and am thining to pay it off now.
    the car was on my dad’s name.
    now after paying it off..what is the procedure to get the bank’s lien released on the car rc book..is it required for my dad to go to the RTO and get it removed..and will the bank takes care of it..

  16. Sundaram,
    I must admit that my understanding on bank lien process is limited. In most cases the banks take care of it supported by their team of RTO agents. I would suggest you to contact the bank for details.

  17. parmi says:

    sir
    i had taken a sbi nri home loan – under max gain scheme.last year.
    loan amt is 29lakhs.

    recently, i ready somewhere that

    Effective Rate (as on 04.02.2013)

    Upto 30 lacs 09.95%

    but in my sbi online account, it shows interest rate as 10.7%

    is this something i should take it to the bank and clarify..or am i missing anything here.

    thanks for your valuable posts here.

  18. Parmi,
    Please refer to https://www.sbi.co.in/webfiles/uploads/files/1327043528466_APPROVED_MITC_VER6_APPFORM.pdf for terms of your loan. (Read section “Intimation of change in Interest Rate:”).

    I agree with you on your interest rate point. Kindly get this checked with your Relationship manager in SBI.

  19. parmi says:

    sir,

    i went through the link you posted.

    need clarification on the below:

    Intimation of change in Interest Rate:-
    The borrower shall be deemed to have notice of changes in the rate of interest whenever there are changes in Base Rate or increase in interest rates where there is no change in Base Rate are either displayed on the Notice Board of the Branch or published in news papers or made through entries of the interest rate charged in the passbook/statement of account furnished to the borrower and the borrower is liable to pay such revised rate of interest.

    ———–

    what it the difference between base rate and the interest rate..so,does the rate published by RBI for floating/fixed is a base rate or the actual interest rate that banks should follow.

    how much more can banks charge above the base rate fixed by the RBI..

  20. naga says:

    sir,

    how does taking NRI home loan with lic differs from taking the same with nationalized/private banks
    with lic being more of a corporation and falling under pure banking system..do they still abide by the banking rules of RBI.
    any specific advantage with going for LIC home loan …

  21. Naga,
    You don’t take a loan from LIC but from LIC Housing Finance. Agreed that they are not regulated by RBI, but by NHB (National Housing Bank) which is wholly owned by RBI. Such housing finance companies are regulated under a seperate of rules.

    Ideally, I would go for a loan from any place which :
    1. Gives me the loan;
    2. Is cheapest and
    3. Least restrictive.
    If my criterias are met, I really don’t care if it is a bank or housing finance companies.

  22. Parmi,
    Base rate of a bank is different from the interest rate it charges its borrowers. Base rate actually reflects the minimum interest rate below which a bank will not lend except in specific cases allowed by RBI. This rate is arrived by the respective banks after doing an analysis of their cost of funds and operating costs. There is one base rate per bank and each base rate could be different depending upon the internal dynamics and cost structure of the respective bank.

    Base rate plus Margin = Loan rate.

    The more risky a loan is, the higher is the margin. I am not aware if there is a cap put in by RBI on maximum amount which Banks can charge over base rate. However they need to file with RBI interest rates on a quarterly basis.

  23. lavakumar says:

    sir,

    i want to take a loan with sbi for buying a residential property..i understand it comes with the condition that i should start to build a house there within the next 2 yrs.

    but would like to get the below clarified.

    1.what happens if i am not to start the house construction within 2 yrs
    2.what happens if i am unable to pay EMi after 2 yrs..will the bank take over the land and put it on a sale and if the sale amount is more than what i owe them, will they give me back the excess money…or will they give me time to sell the sand and settle them.
    3. if above 2 happens, will it affect my credit history/gets reported to CIBIL

  24. Hi Lav,
    If you don’t meet the terms of the loan, then the bank has a right to close the loan and demand for the funds it has lent to you. If you don’t have the funds, then the only option is to put the land on sale. Generally the bank will not let you sell the land as it will have its own team which deal with such cases. Any excess after deducting all loan, charges, fees and expenses is given back to the borrower.

    Definitely it should make a dent in your CIBIL report.

  25. caleb says:

    Hello sir,
    I wanted to buy a residential land/plot in chennai..and looking for a bank loan with SBI-
    I understand SBI allows for loan on property but under the condition of beginning the
    house construction within 2 years

    But in these 2 rys..will i be paying only the interest component like the one in holiday period for under construction properties or will it include principal component as well.

    i am looking for bank which has only the interest component in this 2 yrs period.
    please advise few banks that does this..

  26. Caleb,
    In case of normal home loan, your repayments will start from the next month after the bank disburses the loan. Hence you will have to pay the principal amount + Interest (i.e. agreed EMI) within the 2 years as well. I am not sure which banks will provide you a holiday period during the construction period.

  27. learner says:

    sir,

    i have taken a max gain loan with SBI in chennai – taken for an amount of 30 lakhs….and it is for an under construction flat..this loan was approved a year back and have been paying EMI as well…i made it very clear at the time of documentation that I dont want to buy any sort of insurance.

    i have recently seen a charge of 26k in my account – and they say it is for general insurance to cover the building and this insurance is again an SBI product.

    questions –

    1. is it mandatory to take ? they say as per the arrangement letter, i should taken it…interestingly they never mentioned about it.
    2. is 26k bit high for a loan of 30 lakhs..if i buy it outside, will i get it cheaper..where else can i buy this general insurance..which other companies offers this.

  28. Learner,
    You are not obliged to take an insurance, though it is a good idea to take it. The issue is that if you signed the docs without reading them, you may have signed an insurance agreement as well. Try going back to SBI and raise a formal complaint to get this insurance cancelled.

    While there are a lot of insurance products available in the market, I would suggest to have minimum of the following :
    1. Term Insurance – which would pay the dependents sum assured in case of death of insured. This should not be costly and for 30 lacs, it could be around 8-10K max.(http://insight.banyanfa.com/term-insurance-first-step-towards-financial-planning/)
    2. Medical Insurance – to pay for hospitalisation (http://insight.banyanfa.com/medical-insurance/)
    3. Critical Illness cover – http://insight.banyanfa.com/critical-illness-insurance/

    These insurance would protect you for majority of the risks.

  29. learner says:

    sir,

    thanks for your reply.
    but,just to be clear,i am not referring to term/medical/critical insurance…i had clearly rejected it at the time of documentation and they didnt charge me for it.but this is altogether a different insurance that we are talking here..which is a home/building insurance,per the bank,is to protect the property from any natural calamity and as per the bank it is a MUST to take…which is something I cannot accept.
    I am thinking of taking this matter to the Principal of Nodal officer for SBI first, and then to the banking ombudsmen..is this a right path to go?

  30. I support your view. Also, you can’t contact ombudsman unless you have gone through the complaint process of SBI first.

  31. Leela says:

    Thank you so much for the useful advise. I am planning to apply for a home loan with HDFC for an appartment in India. I am wondering if it is worth taking an unsecured loan from a bank in the UK where I live for some part of the loan as the interest rates are much lower here and take the rest from HDFC. I am also wondering how I should do this- should I first apply to the Indian bank first and then apply for the unsecured loan once the home loan is sanctioned. Will either bank find out about the other loan? If so, will that affect my credit rating? Many thanks.

  32. Leela, please could you email this question to our email I’d info@banyanfa.com for a response from our end.

Leave a Reply

Set your Twitter account name in your settings to use the TwitterBar Section.
Close
Would you consider liking our page ?
We provide regular updates on our Twitter, Facebook and Google plus pages to help our followers financially. You may click the buttons below to get updates.
Web Design MymensinghPremium WordPress ThemesWeb Development

Delhi – Odd Vs Even Formula

January 2, 2016January 2, 2016

The actual success of the Delhi government’s odd-even formula will be known only by January 15, but if the response of most Delhiities on the first day is any indicator, then the risk taken by Arvind Kejriwal’s Aam Aadmi Party seems to have paid off.

The local government will review the effect on pollution after the 15-day trial and consider including two-wheelers in the second phase of the scheme.

For more click here