INDIA BUSINESS WORLD - JULY - AUGUST - 2007
The Month that was ...

HDFC ENTERS HOME EQUITY BUSINESS

HDFC, the country's largest housing finance company, has made a big move in the home equity business by offering loans against property at 13.25%. This could turn out to be big business opportunity for the lender since most of its borrowers pre-pay home loans.

The finance through the home equity route makes available finance at a cheaper rate than, say, auto finance or personal loans with easier repayment schedules. HDFC expects a big demand for this product from borrowers who have cleared their mortgage dues. This loan would also be available to existing borrowers, if the market value of the property is much higher than the outstanding home loan. The advantage of this loan over the existing top-up loans is that there is no Rs 5-lakh ceiling, which is applicable on top-up loans.

Renu Sud Karnad, executive director, HDFC Ltd, said, "`Asset Plus' is not a new product from HDFC in the true sense. However, it is now structured differently, and is aimed at assisting customers to meet their immediate financial requirements while they continue to occupy their homes. Also, if compared to a personal loan, the interest rate on `Asset Plus' is lower and loan term is much longer. This gives a borrower the option to spread the loan repayment over a longer period of time, in effect reducing the immediate financial burden."

Interest rate for `Asset Plus' loans will be charged from 13.25% onwards on floating rate loans and the loan term against residential premises is 15 years while the term for non-residential property is 10 years, subject to the age of customers. The product entitles customers to loan sizes beginning from 50% of the market value of the property. Subject to the market value of the property and loan eligibility criteria, HDFC's customers can have a total exposure of up to 70% of the market value of the property and at the same time get an interest rate which would be lower than non-HDFC home loan customers.

The eligibility criterion for `Asset Plus' is that the property needs to be freehold, self-owned and fully-constructed, with a clear and marketable title. One can also mortgage a joint property by having all owners as co-applicants for the loan. Although a small business in India, loans against home equity are big business in developed market like the US. However, since this involved increased leveraging, the loan product increases the market sensitivity to interest rates and real estate risks.