How I funded my dream restaurant!

By Kapildeo Singh

In the world of investing, your home is considered to be the most illiquid investment. After all, you cannot sell it on a whim -- simply because it's probably where you live!

But Rohit Jain, 35, who owns and manages a small catering business in a Mumbai suburb, turned this illiquid investment into great value-for-money - while still living in it! Rohit feels that this is the best decision he has ever made.

Rohit, who is married and has a three-year old child, always wanted to own his own restaurant, someday. He had a business plan but no funds. So, he approached a private bank for a business loan.

It so happened that Rohit bought his flat sans taking a bank loan. On seeing this, the loan advisor suggested that Rohit could go for a loan against his property because this would be a cheaper option than a business loan. One year down the line, Rohit is successfully running his restaurant and is planning to expand his business after repaying this loan! 

How Rohit did it

Most banks offer loans against real estate property, provided you meet certain conditions:

a. The property has to be free from any liability and should be in your legal ownership.

b. Your EMI should not exceed 50 per cent of your monthly income. Sujan Sinha, Senior Vice-President-Retail Assets, Axis Bank says, "Banks are not in the business of buying or selling a property; we only consider property as a security for the loan amount. And because the loan amount can amount to several lakhs, real estate security makes it easier for a bank to lend."  Of course, it goes without saying that you need to have a healthy credit history, too.

c. You need to explain your reason for taking a loan in a declaration form, along with the application form. This means that the bank will not loan money against your property for speculative purposes - like gambling or even stock markets.

Once you meet the following conditions, the bank will appoint two independent evaluators to take stock of your property. Sujan says, "Of the assessed values, the bank will accept either the lower of the two or an average of the two. This depends on the bank but whatever the case maybe, the banks lend up to 60 per cent of the property value."

Rohit needed Rs 13 lakhs to kickstart his dream project. His flat was valued at Rs 28 lakh by the bank, and he qualified for a loan amount of Rs 14 lakh. Rohit's flat was co-owned by his wife.

In such a case, Hiren Fotaria, manager of Universal Enterprises, a Mumbai based loan and real estate consultant, says, "All the co-owners need to be co-applicants, but not necessarily co-borrowers."

Additional charges
 
i. Currently, these loans come with an interest rate of between 13 to 14% per annum, which is cheaper than other options like personal loans.

ii. The processing fee is approximately 1%, which can be negotiated.

iii. The property valuation fee ranges between Rs 500 and Rs 2,000.

iv. The legal fee (including document verification and title check) is around Rs 1,500 to Rs 2,000.

v. If your house isn't insured already then the bank will insist on an insurance policy as well. For the purpose of premium calculation, the value of your home structure is assessed as per the area of your home multiplied by the rate of construction per square feet, as on the date of taking the policy.

For example, if your home is 1,000 square feet and the construction rate per square foot is Rs 800, then the sum insured for your home's building structure is Rs 8 lakhs. A home insurance policy that covers the structure of a house for Rs 8 lakhs would come at a premium of around Rs 700 per year. 

The best part: you don't need to run around to buy this policy. Private companies like ICICI Lombard and Bajaj Allianz sell these online. All you need to do is log on to the company's web site, fill up the details and make your payment. The company will carry out its valuations and give you the policy.

vi. The stamp duty and other documentation charges are nominal.

vii. If you wish to prepay your loan, the banks will charge you a prepayment penalty, which is around 1% of the outstanding principle amount.

Pay up or lose your home!

Since, this is a secured loan against your property, the loan contract you signed says that it is the right of the bank to confiscate and, if need be, sell your property to recover it's cost. Besides, you will land up with a bad credit score, which threatens to disqualify you from any future loans!