When you are in urgent need of funds, mortgaging your encumbrance-free house is a good option.

Financial emergencies can be of many types and during such situations sometimes the quantum of funds required could run into a few lakhs, just like Raghav, my elderly friend, had to face recently.

Raghav was looking for a bridegroom for his daughter but had not imagined that he would find one so quickly. Almost at the same time his son who had applied for a seat for his MS in a Swedish University got his admission intimation as well. In total the financial need was in excess of Rs.25 lakh.

Raghav started to think of whether to go for an education loan for his son’s two-year education cost or look for funds from any other source. His concern over seeking an education loan for his son’s specialisation at a foreign university, which was quite expensive, arose from the fact that most countries were facing financial troubles and slowdown in job opportunities. Raghav feared that the loan could be a burden in case his son finds it difficult to find a good job upon completion of his course.

After deliberating on the issue and taking advice he decided to go for loan against property by mortgaging his house.

If you have a freehold property (with no loans outstanding), the same can be mortgaged to a bank or a housing financial institution (HFI) for the sake of a loan. The purpose of such loans can be for higher studies, marriage, expansion of businesses, family vacation, renovation of house, medical emergency and any other financial contingency which may require large amounts of money.

The bank/HFI would need the original documents including the latest encumbrance certificate and under certain circumstances may also ask for a guarantor. The quantum of loan would be on an average 60 per cent of the market value with repayment options ranging from five years to a maximum of 10 years.

The basic eligibility is that the individual should be salaried or self-employed or a professional, the upper age limit being 60 years.

High interest rates

Unlike a home loan whose interest rates are comparatively low, the interest rates on mortgage loans are a tad higher.

The current rate of interest charged is in the range of 13 to 14 per cent. The loan can be prepaid too without any penalty.

The EMI outflow for loans for the aforementioned purposes does not qualify for any tax exemption under Sec. 80C or Sec. 24.

Specific tax exemptions will have to be checked with a chartered accountant based on the purpose for which the loan has been utilised since these are not part of the usual home loans.