Thinking of applying for a loan against property? You should first have a clear conception of what this kind of financial product is. Loans against property are usually offered by most banks and financial institutions. You stand to get a bigger amount as loan if you have your property listed as collateral as compared to other loan types. LAP or loan against property is thus a secured loan and can be taken for multiple reasons, right from funding business expenses and higher education of children to weddings, medical emergencies and so on.
Of course, there are a few fundamental aspects of these loans that you should definitely consider. The types of properties include self-owned residential property and self-owned and occupied residential property along with self-owned yet rented residential properties, self-owned land, self-owned yet rented commercial property and self-owned commercial property. Keep in mind that the property value is not the defining aspect when it comes to taking decisions on loan eligibility as far as banks are concerned. You should always keep in mind that financial institutions mostly sanction loans up to 65% of the property value. The tenor for these loans is usually 15 years subject to age related regulations. The interest rate also ranges between 12-16% on an average.
Banks will also consider your monthly income, employment details, professional experience, overall savings and repayment ability prior to sanctioning the loan against property. Your property will also be evaluated in order to determine its present market value and the loan amount will be worked out accordingly. Obtaining a loan against property will be much easier in case you have all the necessary documents with you. These include the KYC (Know Your Customer) documents, namely proof of address and age and also the ownership documents of the property along with income related documents. You will also have to provide a cheque for the processing fee and bank statements for at least 6 months. Many people apply for loans against property in order to fund renovation or expansion of their homes itself. In some cases, many use the funds as flexi loans for starting new business ventures or consolidating other debt. Many people also purchase other properties with the loan amount in order to build assets while repaying the loan smoothly at the same time.
Your property value is a key indicator in this type of loan. The value of the property will naturally be guided by factors such as its age, locality/area where it is located, the developer’s overall reputation, the amenities on offer and its size among other such parameters. Borrowers should have a clear picture of the property value at all times in order to insist on banks offering them the requisite loan amount. Lenders usually consider it a lower risk in case the borrower owns property of high value in a good neighbourhood. Eligibility criteria also varies from one lender to another. As a result, borrowers should certainly check criteria across multiple lenders before they finalize one. Whenever a borrower wishes to apply for a loan against property, he/she should always compare multiple lenders and check out the rates of interest and the amount of loan possible. Comparing and contrasting will naturally facilitate a smoother and faster decision. Borrowers should also keep an eye out for processing fees and other charges.
One should be clear about the amount that is required for meeting a specific purpose and there should be a repayment plan in place as well. Simply applying for a higher amount even when one does not need it is foolhardy since the monthly outgo will be more in terms of the EMI that is payable. Be clear about the amount that you require and why. Also have a budgetary plan in place with regard to repaying the loan EMI every month. Make sure that the EMI is repaid on time without any defaults or delays. You should also look into some additional services and benefits that your lender may provide including guidance on selecting the right type of property for your needs if you are investing in another home, guidance with regard to the loan type, interest rates and even insurance plans. Go for lenders who have swifter approval procedures and easy online application systems in place. This will help you save a whole lot of time and energy in the bargain. On that note, here’s looking at the 5 things that you absolutely should know before applying for a loan against property.
5 Things to Know Before Applying
- Banks mostly verify some specific records prior to giving approval for the loan. These include your payment track record, credit history and repayment ability. In case you have other debt, loans and liabilities, your overall loan eligibility will naturally reduce a little. Certain financial institutions also consider the number of dependents in the family. The higher this number, the lower your overall ability to repay the loan in the eyes of the lender.
- Loans against property are available with tenors up to 15 years. They usually come with flexible options pertaining to repayment and fast approvals. There is minimal documentation in most cases too. Yet, your loan application may not be approved by the bank in case the property that is being put up as collateral is engaged in a legal dispute or there is no clear ownership proof in the property papers.
- LTV (Loan to value) ratio- This ratio is basically limited to 50-60% of the market value of the property in question. The loan amount may range from Rs. 5 lakh to even Rs. 500 crore and tenors may also increase to 20 years in some cases.
- You may lose the property which has been put up as collateral against the loan in case of defaults. As a result, you should always refrain from over-leveraging yourself since this may lead to higher chances of default. In case the property is disputed, the lender may also reject your loan application.
- Loans against property do not come with any tax benefits in the manner of home loans which have benefits up to Rs. 1.5 lakh on principal repayment and up to Rs. 2 lakh on interest repayments annually.