Hitesh works in a private firm while his wife Divya is a teacher. In their late forties, the couple have two children. Due to their limited income, they have not been able to save much. They live in their own house, and will pay off the home loan in five years. They bought the house for Rs 50 lakh 10 years ago. It is now worth Rs 1.5 crore. They have their PF savings and some investments in mutual funds. Their elder son wants to set up his own business and Hitesh wants to provide the seed capital. Should he draw from his provident fund?
Hitesh and Divya’s financial situation is typical of many middle class families which find it difficult to put together money when a lump sum is needed. Withdrawing from the PF account is not advisable because it is their primary savings for retirement. They will also lose interest income on the corpus till they repay the loan. Personal loans will be expensive given that they are unsecured and of a shorter tenor. It will imply higher EMIs which they can ill-afford.
They can consider using their key asset, the house. They can avail of a home equity loan, which is a loan given against the appreciation in the market value of the property by banks and housing finance companies. The loan is typically given on fully constructed property with a clear title. They can take a home equity loan even when they have a home loan outstanding. The lender will assess the current market value of the property and deduct the outstanding loan amount from this value. 50 to 60 percent of this net value will be the eligible loan amount.
The advantage to Hitesh and Divya will be that they will have access to a large loan at good rates. The loan can be repaid over a longer period of up to 15 years, depending upon the retirement age. The lower EMIs will be helpful given their financial situation. Using this option would give Hitesh and Divya access to the funds they require at a reasonable rate and with the repayment terms that is suitable for them without endangering their retirement corpus.