Know more about Loan against Property

One of the recent popular modes to acquire additional funds is to secure a Loan Against Property. It is preferred mode over the other competitive loans like a Personal Loan or a Home Loan. The main deciding factor to select any particular kind of loan is the interest rate or the formalities involved in acquiring one.

What is Loan Against Property (LAP)?

The term ‘loan against property’ is in which the borrower takes a loan from a bank or financial institution against the security of a property owned by the borrower. The nature of the property will determine the amount of the loan that is possible.

Being a secured loan, the interest charged on it are lower than any other alternatives of loan. The average range of interest rate is from 12%-16% pa for a tenure of 15 years.The only deciding criteria is the condition of the property that helps the lender decide the market value of the property. The loan is given on certain percentage basis (around 40-60% of the value) of the market value of the property.

What kind of properties are used for LAP?

• Self occupied residential Property or any other self owned property
• Commercial Property owned by borrower

The only criteria being that the property should be free from any mortgage or any other lending.

What is the main purpose for LAP?

Although, LAP has the following applications, as a Financial Planner, we advise to go for these options only if you have secured well for your primary financial goals and have a huge property asset lying unutilised at your end.

• Business expansion
• Son/Daughter marriage
• Son/Daughter Higher education abroad
• Dream vacation

Who is eligible to get a LAP?

Any individual including the salaried,professionals or even self employed individuals are eligible to take a loan. The main criteria in addition to financial stability is the age factor of availing the loan.( generally the minimum age to acquire a LAP is 24 years). 

Compare the LAP services

A visible comparison of the existing LAP services made available by financial institutions. Please note that the detailed information can be made available on their respective websites.

	SBI	HDFC Bank	Bajaj Finance
Interest rates	2.50% Above base rate. Currently at 12.50% pa	11.35% to 13.35% pa	Not available
Margin for Loan	60% of Market Value	60% of Market Value	Not available
Tenure	5 -10 years – term loan in equated monthly income	Upto 15 years.EMI /Overdraft facility available	15 years
Eligibility	24 times of net monthly salary or 2 times net annual income	Varies from case to case	Varies from case to case
More details	Special product called rent plus for commercial /residential rental earnings	Overdraft facility , rent receivables	Lease Rental discounting
Website	https://www.sbi.co.in/portal/web/personal-banking/loans-against-property	http://www.hdfcbank.com/personal/products/loans/loan-against-property	https://www.bajajfinserv.in/finance/loan-against-property

Update on discussion topic for coming weeks - on asset utilisation

Fixed Assets can serve a dual purpose of fulfilling our financial goals and also help in meeting our additional unplanned requirements. There is a possibility that we may have designed our financial plan well and earmarked our assets for achieving these long term goals. This is a very idealist situation. But in reality, there could be multiple goals in between which could require additional funds to be fulfilled. So how can we meet these goals? Can we earmark these long term fixed assets to help us meet the short term goals? Can we utilise their market value by temporary mortgaging them to supplement our additional goals including business expansion or dream vacations or even spending to refurbish the entire home. In our coming few posts , we would be discussing these alternatives to Personal Loan or Home Loan. Stay with us to understand more about them.

Gift a better future

The older generation now in their mid fifties or more elderly usually complain about the younger ones not being frugal in their spending nor having a say on their children's money habits. They find it many times shocking that in spite of high earning and multiple earning opportunities the younger lot is struggling to manage their home finances well. At times, the spending made on personal gifting,holidays or extravagant birthday celebrations gets a mixed reaction from the older lot. For them, the concept of savings is still at 80% of monthly total earning.

So, many times they try to enforce these simple things to get compulsive savings for the future of the their next generation. The approach remains non-interfering and easy for them to monitor.

• Gift a savings account – Create a separate savings account with joint holding with your children or grandchildren. In case of any special occasion like birthday or anniversary celebration or any other achievement, add in some money into it as your souvenir. You can even add a small amount on a monthly basis to add to the savings.
  
  

• Gift a small piece of metal – We are habituated to gift idols of God on any house warming party or even marriage ceremonies for that matter. So, if instead we contribute as per our budget a small piece of silver/ gold coin or even raw metal to the family it can be a useful investment for them. Today, the available denominations of coins are very small ( as low as half gram). So, instead of gifting loads of ceramic house decorations or expensive flowers, this can give the recipient liberty to spend it as per their preference.

• Create a demat account – If you intend to handover some kind of capital market investment to your children in future, start adding value to it by creating a demat account. On doing so, you can ensure that the wealth is in bits and pieces transferred to them as well as you can also add more value to it by purchasing time and again capital instruments to it. You can be assured of transfer of assets in your presence without any chaos or dispute.

• Contribution to expenses - This method though might be useful for a little younger aged children but it stills create great sense of responsibility among the children. It may include asking the children to contribute in home expenses or even pay rent for their stay at home although you might not need that money. The same can be then reinvested by you in their name for future growth aspects. Decide the quantam of contribution always in terms of percentage to avoid them getting into mode of numerical values calculations.

These methods are age old and can be implemented at any stage of life. For some it might sound foolish to do so considering the amount saved via this strategy. So, what we advise is to alter these techniques as your situation.It is recommended however to make a beginning.

Are you really financially prepared?

Most of us associate goal achievement with fulfilling of our family responsibilities. If we are able to meet these responsibilities then we assume we don't need any financial planning. We hear many statements from our clients mentioning that we don't need any kind of planning,we have sufficient funds in place, I have crossed the age of planning and many more such statements. As a Financial Planner when do we say that the client is completely prepared for all his financial requirements.

Simple questions to check your financial independence:

• Can you completely leave your active working life to survive the rest of your life?
• Can you bifurcate your existing assets for your different goals and achieve your goals without any further twitching?
• Have you settled all your liabilities and can still manage your goal achievement?

Myths Busters : A few myths attached with goal achievement.

• Inflation – We make certain annual calculations as per our current expenses and assume it to cover all our requirements. Like you say, I have two land properties that will grow in value terms in coming few years and it will help me to cover for my daughter's wedding expenses or my retirement. However, the biggest road block in this growth is inflation – the increasing cost of living.The average inflation increase over the past few years have been around 7-8%. This means that every year the cost of essential goods has increased by 8% per annum. So, if you have think you have saved for retirement to maintain your lifestyle as per current expenses it is not sufficient.

• Insurance Policies - Owning number of polices especially expensive endowment or whole life policies is not sufficient. Endowment policies assure good amounts on maturity including hefty bonuses however these good amounts are not sufficient to cover your life expenses. More so even the monthly pension that we receive may not be equivalent to the monthly home expenses.

• Expecting family wealth - Many times, we delay or avoid our financial planning considering that we are going to own a huge amount of family estate as lineage over the coming times. It might give us a mental satisfaction but does not assure any concrete guarantee of the amount to be received. The only possible thing is if in case the amounts are not as per your calculations, you might suffer in your sunset days. Like if you get a property out of the estate and you expect to make good profit out of selling it. It could be possible that the property market at the same time is at its bottom low and the desired price cannot be achieved.

• Fixed Asset Allocation – Allocating assets across your goal requirement or identifying which asset would help you meet your goal is better then leaving unplanned assets. However, leaving the allocation unchurned or not reviewing it is equally harmful for goal planning. Assets should be regularly reviewed and monitored to match the goal requirement. Change in policies, taxation rules could make any particular asset class less attractive. So, it is necessary to keep on reviewing it regularly.

Hence, we state that even though you own assets and have sufficient monetary cushion, it is required to continuously monitor your decisions. A plan is never perfect and it gets better with every further review.

Update on TDS on RD + Fixed Deposit

Just wanted to share an important announcement that is usually misinterpreted by many of our clients. As per the new Finance bill 2015, effective from 1^st June 2015, the interest earnings on Recurring Deposits would also be subject to TDS at the banks. This means that going forward, interest earnings for Fixed Deposit and Recurring Deposit across all the branches of the bank would be subject to TDS beyond the exemption limit. Previously, the exemption limit was made available at branch level but now the rule has been amended.

Investment avenues for special dependent

As discussed in our previous article, we need to save for the entire life of disabled dependent. It is not so different from saving for any other goal. The only difference lies in the availability and management of these savings for the sole welfare of the disabled dependent. So, in order to ensure that you plan well your investments, we should take care of following points:

• Regular Income
• Maximum Tax benefit
• Lowering investment charges
• Clear nominations
• Appointment of Guardian

For Regular Income – To ensure that you get regular income for your dependent directly credited in their bank account, investment is recommended in fixed and secured investments. It should be made irrespective of the low rate of returns. It should be made for longer duration and also preferred to be tax efficient. The quantum of this investment should be calculated by living expenses requirement. Suppose, you require Rs.60,000 per month for living, you should invest around Rs.80,00,000/- to support your lifestyle. Some of recommended asset classes would be:

• Fixed Deposit – It is simplest to operate and ensures that capital is secured.
• Real estate- It is recommended you create a real estate rental income in their name so that this income can supplement his monthly income requirement. Please ensure you nominate the dependent and let it be managed by a guardian.
• Liquid funds – These funds are to meet the emergency requirements of health. It could be possible that even though you may take some additional health cover for the dependent, it has some exclusions and gaps to be filled.
• Equity funds- Even if you favour equity based exposure; it should be ensured that it generates some regular income like dividends or high dividend yielding stocks.

For Tax benefits – Be aware of the various deductions under section 80 for the disabled dependents.

• 80U- Deduction to be claimed in case of self disability. The said definition of disabled is defined in the IT Act, 1961. Amounts amended in latest budget as Rs75,000 for person with disability and Rs.1,05,000 for person with severe disability. To avail the deduction, a certificate is required from the certifying medical authority (approved by the government).  At the time of filing return, be sure to fill the required separate forms.

• 80DD – Deduction can be claimed for dependents for expenses borne by assessee. Dependant means spouse, children, parents, brothers & sisters of the taxpayer. The expenses can be claimed for medical, nursing or rehabilitation of the dependent. As per the latest budget, the allowable deduction is for disability from 40% -80% - Rs 75,000 and beyond 80% - Rs.1,25,000.

Insure your life – Life insurance is taken to cover the life risk from any kind of untold eventualities. However, when you have a disabled dependent it is always advised to have a policy with sufficient sum insured (at least 10 years of your current annual income) in the name of earning member. There are whole life policies, which can be left as a nomination to the dependent. This will ensure lump sum payment in case of any fatality. There are even special plans, which give accumulated amounts on maturity of policy and then again, on death of insured. Although, it could be expensive investment, it can be used as a diversification tool.

Creation of trusts - The specific trust created for the welfare of dependent frees one from any kind of fear regarding the misuse of the attached assets. We just need to follow some few rules will creating a trust:

• Create a trust with exclusive purpose (specific trust) to provide regular monthly income to dependent and bear all medical contingencies.
• Attach all investments especially real estate to ensure the rental income is not misused.
• Get a well trusted person to manage the regular working of the trust. Ensure timely audit to avoid any misuse of funds. It should be created in your life time.

All the above investment avenues are to be double sure that the dependent is not left in any financial crunch after you. It is essential that the process is started at earliest. If it is not possible to fund the requirement at its fullest make the minimal investment as possible.