Cash dash: Loan against home is cheaper

Zara Fernandes, 28-year-old public relations professional, was in turmoil in July last year. Her father needed urgent brain surgery and she had no idea how to rustle up the money.

Her relatives suggested selling her family flat but that would have meant Zara and her mother -- and later her father -- would have to live in a rented house.

Then someone suggested a loan against the home. It was a Godsent idea. An old family friend, who was a director in a co-operative bank, expedited matters and soon Zara could avail of a Rs 600,000 loan for ten years against her Rs 20 lakh (Rs 2 million) family property.

She got the cash in a week and things ended well, with her father's successful operation.

But Zara, who pays an EMI of Rs 8,000, cautions, "Unless you are in a dire situation don't pledge your property. There is always this sword hanging over my head that I have to get the house back."

As an afterthough, she's quick to add: "But then again if I had not pledged the house, I wouldn't have got that big amount."

A comparison of a clean or unsecured personal loan with a loan against a home/car will show that the interest rate will be lower in the latter case. This is because if the borrower defaults the bank can sell the security and recover the loan.

The interest rate differential between the two is typically about 2 per cent. There is also another advantage of the borrower being able to borrow a larger amount if an asset is pledged with the bank since the loan is given not only on the strength of one's income but also one's pledged asset.

Private banks such HDFC Bank and ICICI Bank offer an overdraft facility against cars too.

HDFC Bank gives a draft limit of up to 65-90 per cent of the market value of the car. The car should not however be more than 10 years old at the end of the tenure of the loan. But remember the depreciation of most cars are steep.

Zara had to get three guarantors one of whom was her mother since the house was partially in her name. The need for guarantors varies from lender to lender.

Housing finance major, Housing Development Finance Corporation takes a call on whether a guarantor is needed on a case-to-case basis. HDFC filters its customers, the corporation's home equity loans are available only for borrower's whose homes are valued at over Rs 10 lakh.

State Bank of India, on the other hand, has a unique product under mortgage loan in which the borrower can take a loan against a third party's property, who need not even be a blood relation!

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