Wednesday, 16 May 2012

Home equity loans


Many times people have confusions and myths about mortgage loans. They are not sure if they are utilizing their property in the right way or not. This confusion mostly happens because the tedious processes and the intricacies are too complicated for the common man to understand. The article below will give an expert view to all the queries regarding home and mortgage loans dilemma.

Loan against Property (LAP) is also known as ‘Home Equity’ (HE) which helps the consumer to unlock the true value of their property by taking a loan against their property (not in legal dispute). Home equity loans are availed by consumers, who wish to mortgage his/her property to the bank for availing some loan for personal requirements like, working capital for business, personal expenditure, medical expenses etc. Both the residential and non residential property can be considered for the approval of the loan.

Targeted at self employed and SENP (Self employed Non Professionals) segments, Cash flows are analyzed for business potential and loan eligibility. Higher ticket size as compared to Home Loan and typical loan to value (LTV) is 50%-60% of the property value. Average loan size for LAP/HE is 30-40 lacs and 50-75 lacs in case of metros and mini metros. Maximum tenure is 15 years and average tenure is 4-5 years and spreads are higher than Home Loan (HL), 3.0%-3.50%. Due to increasing competition resulting in pricing pressures in the Home Loan market, financiers are focusing on home equity for growth and maintain spreads. The market is expected to grow at a CAGR of 25%-28% over the next five years, reaching INR. 33,000 Crores in FY 2014. LAP market currently majorly exists in metros and mini-metros.

This product as well as the customer segment is in the evolution stage as compared to a tradition Home Loan segment. The business class segments are not very educated on the Home Equity offering, they usually get fleeced by mediators, brokers or small time DSAs. These intermediaries charge processing fee or loan facilitation fee (over and above the fee being paid to financier for availing the loan) which is unnecessary burden on the middle class consumers. The consumers who are in financial crisis and don’t have a proper understanding about the facilities available directly by the bank or by the organized players end up paying facilitation fee.

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