What is a loan against property or LAP? This is nothing but loans that are sanctioned by financial institutions on the basis of the value of a property which is mortgaged to the financial institution for availing of the loan. These loans are considered secured loans since they are given against residential/commercial property. Loan against property is only given for freehold properties and there should be clear titles of owners on the same.
Key Pointers for Loans against Property
Here are some of the key pointers for loans against property that you should keep in mind-
- The loan amount in this type of loan is higher as compared to other quick funding choices.
- Rates of interest are usually lower as compared to personal loans or other unsecured funding.
- The tenor is usually quite high at 15 years or even slightly more.
- The loan amount can be availed as a handy lump sum or even as an overdraft facility.
- Borrowers can deploy the funds as per their own requirements and processing and approval times for these loans are more or less between 15-30 days.
Key USPs of loans against property
- You can use the loan amount for any purpose you want.
- There is a long tenor which means that the EMI will be on the lower side.
- The loan can be taken against both let-out and self-occupied properties.
- You can generate funds during emergencies or for sudden business/personal requirements by tapping your idle asset.
- The property ownership will never be transferred; it is only a mortgage of your property in this case.
Disadvantages of loans against property
Here are some of the drawbacks of loans against property that you can also consider-
- Loans are usually not sanctioned beyond 50-60% of the market value of the property.
- There is always a risk of losing one’s property in case of defaulting on the repayment of the loan.
- You cannot get any tax benefits on the repayment of principal and interest in this type of loan. In a regular home loan, you can get deductions on principal repayment up to Rs. 1.5 lakh under Section 80C and deductions on interest repayment up to Rs. 2 lakh under Section 24.
- The proof of income is compulsory for this type of loan. This automatically puts new businesses out of the reckoning if they need funds to get started.
- Processing times are longer than many other loans since financial institutions will verify the property documents, assess its market value, evaluate the borrower’s repayment abilities and overall eligibility and then sanction the loan accordingly.
When should you take a loan against property?
There are several reasons why you can opt for a loan against property ranging from personal needs to business objectives. Here’s looking at some of them.
- Many people take loans against property in order to meet business objectives, namely expansion of a business, consolidation, raising urgent working capital, meeting big orders by stocking up on inventory and manpower in advance, buying any other business asset and so on.
- Some take this loan to meet necessary medical expenses without having to fully deplete their savings.
- Loans against property are sometimes taken to finance the higher education of children which can be a costly affair nowadays.
- Many take this loan for repairing and renovating their homes as well.
- Loans against property are also taken for paying off all wedding and other ceremonial expenses in the family.
- Some even take this loan to go on dream national/global vacations with their family and friends.
- Many use loans against property to consolidate debt by repaying multiple debts and consolidating the same into a single loan.
Those looking for bigger loan amounts at comparatively lower rates of interest for a reasonably longer tenor should consider a loan against property as stated by several experts.
Eligibility Aspects for loans against property
Financial institutions usually assess the following factors when it comes to borrower eligibility:
- Proof of residence
- Proof of identity
- Bank statements for last 6 months/1 year
- Salary slips for employed borrowers
- Documents of property to be mortgaged
- Certified financial statements for last 3 years in case of self-employed borrowers
- Credit score and history of the borrower
- Number of dependents and age
- Qualification, experience in profession
- Net monthly income, assets and liabilities including debt
- Continuity of profession
- Income of spouse
Post approval, the loan will be disbursed, either in full or in instalments, depending upon the agreement between the financial institution and customer. There may be a choice between floating and fixed rates of interest while there will always be chances to make prepayments for the loan and close it out sooner which is something many borrowers do. The lender usually holds back margin money and sanctions up to 50-60% of the property’s market value since it deems it fit to be protected against market fluctuations and a fall in real estate prices.
What you should do
- If you are applying for a loan against property, make sure that along with interest rates, you compare the LTV (loan-to-value) ratio offered by multiple financial institutions and lenders. Public sector banks usually go up to 65% of the market value of the property while this can be 70% in case of private sector financial institutions. However, it depends on various factors. Bear in mind that the LTV will be lower in case you are mortgaging a commercial property since lenders feel that customers always attempt to save their residential properties ahead of commercial ones. As a result, a self-occupied property will help you get a higher LTV as compared to one that is rented out.
- Consider LAP if you have no other source of funds and urgently require them in the long haul for growing, consolidating or stabilizing your business.
- You can consider the same for personal needs like weddings, higher education and even for building a second home or investing in another property since the rates of interest are lower than personal loans.
- Remember, however, that your property will be at stake till you fully repay your loan. As a result, choose wisely and avoid this type of loan when you are just starting up and your business has a major amount of risk attached to it. LAP should not be your capital during times of risk as advised by experts. It should only be used when borrowers are easily able to repay the loan prior to the stipulated tenor.