In 2013 Apple Inc, the world’s most profitable and cash rich company, surprised the world by announcing a plan to borrow cash from the bond market to reward its shareholders with higher dividend and share buybacks. The company has since continued to borrow every year, taking advantage of record low interest rates rather than dip into its cash pile to pamper its shareholders.
You can do the same in India, thanks to the extremely low interest rates right now. Interest rates are close to 15-year low and banks and non-bank lenders are going out of their way to woo borrowers with ever more attractive offers. The loan push from banks is especially aggressive in the housing loan and car loan segments.
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Low interest rates also offer the best opportunity to leverage your existing assets such as home, commercial property, fixed deposits, mutual funds schemes, gold and even insurance policy to raise funds at a low cost.
The low interest rate regime can be used for interest rate arbitrage, where you borrow at low interest rate to fund big-ticket purchases and use your savings to invest in high yielding financial assets.
Here are five-ways to take advantage of the low borrowings costs right now:
1. Loan against bank fixed deposits. Borrowing against fixed deposits in the banks is the cheapest way to raise funds right now. The interest on loan against FDs is usually 100-200 basis points higher than the prevailing interest on fixed deposits of the same tenure. State Bank of India, for example, currently offers 5.4 percent interest on 5-year fixed deposits and depositors have the option to borrow against this at an interest rate of 6.4 percent.
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The loan amount can be up to 90 percent of the FD value including accumulated interest rate. Other leading banks such as HDFC Bank, ICICI Bank, Axis Bank and Bank of Baroda offer similar overdraft facility against FDs. Loan against FD is also offered by non-bank lenders such as Bajaj Finserv though it charges 200 basis points higher than its FD rates.
Another good thing about loans against FDs is that banks don’t charge any processing fee on this product and the disbursement process is much faster. In comparison, you may have to pay a minimum 1 percent of loan amount as processing fee in case home loans and it is even higher on vehicle loans.
Loan against FDs also don’t require a credit score unlike other retail loans such as home, auto or personal loans.
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Loan against FD is a good option for people with surplus cash planning to make big ticket purchases like a car or renovating their homes. It makes better sense to put your savings in an FD and take out a loan against it rather than take a car loan.
2. Top-up loan against your existing home loans. This is the best time to take a top-up loan against your existing home loan and fund big-ticket purchases. The interest rate on top-up loans are linked to home loan rates and interest on home loans are currently at record lows. This makes top-up loans a great way to buy a new car or renovate your house or make down payment for a second home. For example, the interest rate on car loans starts at 8.7 percent while top-up loans from banks starts at 6.7 percent.
But remember that top loan only works for those who have already repaid a significant part of the principal on their home loan. For example, if you took a home loan worth Rs 50 lakh for ten years and the principal outstanding is now down to Rs 30 lakh, then you are eligible for a top-up loan of up Rs 20 lakh.
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3. Loan against property. Mortgaging your existing residential or commercial property is another way to raise low cost funds in the current environment. While loans against property are more expensive than home loans and top-up loans, they are still cheaper than most other retail loans, especially if you go to the right lender and have a good credit score.
For example, loan against property (LAP) from Bank of Baroda starts at 7.95 percent while HDFC's LAP starts as 8.15 percent. This is lower than what most banks charge for auto loans and other kinds of retail loans. In comparison, ICICI Bank LAP starts at 8.35 percent while HDFC Banks charges 8.25-9.20 percent on LAP based on a borrower’s credit score and the property being mortgaged.
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4. Gold Loan. Most Indian families have a significant amount of investment in gold jewellery. Accumulated over the years, the total investment in gold ornaments is most often the second biggest investment by Indians after a home purchase. Gold is however a non-interest yielding asset and just lies idle at home or in banks lockers. Loan against gold is another way to raise funds at comparatively low interest rates.
Traditionally, the maximum loan given against gold was equivalent to 70 percent of the value of the yellow metal in the jewellery. But in August last year, the Reserve Bank of India increased the permissible loan to value (LTV) ratio on gold loans for non-agricultural purposes to 90 percent. The relaxation is available till the end of this month.
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Stake Bank of India is currently charging an interest rate of 7.5 percent on gold loans, which is lower than what it charges on auto loans, personal loans and education loans. Only home loans are cheaper.
5. Loan against securities: The last 12 months have been very profitable for mutual fund investors. The rally in stock price has pushed-up the NAVs of equity schemes to new highs while bond and hybrid funds have gained from rally in bond prices due to a sharp fall in interest rates. This can be used to borrow against securities from banks and non-bank lenders at low cost. Borrowing against your investment could be a better option than redeeming them if you believe that the annual returns from your scheme exceeds the interest on the loan.
So what are you thinking? Take out your calculator, make an inventory of your assets and utilise the current low interest rate regime to raise funds at low costs to meet your long-term financial and life goals.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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