Do you recall the first day of school when your teacher’s vocabulary seemed so complex? Learning loan against property terminology during the application process can feel a bit similar to that. Understanding the financial jargon associated with a loan against property can be challenging, especially if you are a first-time borrower. However, without a solid knowledge of loan glossary, bargaining the best LAP financing options available in the market might become close to impossible. Therefore, to assist you in mastering such complex jargon, we have compiled a list of the top
loan against property terminology that you should be familiar with before beginning your loan application.
The Most Important Loan Against Property Terminology to Know
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What is Mortgage?
The term "mortgage" in the context of a loan against property refers to an asset such as land or a building that you use as collateral to obtain funds from a financial institution. When applying for LAP, make sure the land or building you are mortgaging has a clear ownership title.
Under loan against property, alternate assets refer to the property other than a residential home or commercial office that you can use as collateral to obtain LAP funds. Some of the examples of alternate assets are hotels, hospitals, farmhouses, schools, etc. The loan against property terms and conditions on alternate assets differ from one lending institution to the next.
What is Loan-to-Value (LTV) Ratio?
A loan-to-value ratio is a ratio that determines the fund value you are eligible to apply for. It calculates the amount you can obtain against the current market worth of your, such as land or building. LAP is usually available for LTV ratios ranging from 40% to 75%.
What is Property Title?
Property title refers to the name of the person who is the legal owner of the property. If you are mortgaging a property with two or more legal owners, you must obtain a NOC from each of them prior to mortgaging.
What is EMI?
The term EMI refers to equated monthly instalments. It demonstrates your monthly obligations towards your loan against property repayment. The EMI includes both the interest component as well as a percentage of the principal loan amount. To calculate your EMI ahead of time, use a loan against property calculator for EMI.
What is Loan Tenure?
The term refers to the length of time for which your lender grants the LAP amount. It is the period of time during which you must repay the principal amount along with the interest component. In most cases, LAP is available for a maximum of 15 years. As a thumb rule, the higher the loan against property tenure, the lower will be your monthly obligations and vice versa.
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What is Interest Rate?
Loan against property rate of interest, or say, interest amount, refers to the cost of borrowing funds through LAP. The interest begins to accumulate when you receive the LAP funds into your account. LAP interest rates are of two types- fixed interest rate and floating interest rate.
What is Fixed Interest Rate?
The term "fixed loan against property rate of interest" refers to a financing arrangement in which the interest rate does not change in reaction to external factors such as market conditions, inflation, and so on. The rate remains constant throughout the loan term, allowing borrowers to precisely forecast their future payments.
What is Floating Interest Rate?
The term "floating loan against property rate of interest" refers to a financing arrangement in which the interest rate fluctuates in response to external factors such as the Reserve Bank of India's (RBI) benchmark rate, inflation, market conditions, etc. When the RBI raises the base rate, the floating rate rises in line, and vice versa. In most cases, the floating interest rate is cheaper than the fixed rate.
What is Base Rate?
The Reserve Bank of India establishes a minimum rate known as the base rate below which financial institutions are not permitted to lend to their consumers.
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What is Balance Transfer?
Balance transfer in loan against property refers to the process where the outstanding loan is transferred by the borrower from one financial institution to another. A balance transfer is usually done by the borrower to benefit from the lower interest rate offered by another financial institution.
What are Documents for Loan Against Property?
It refers to the essential papers, or say, a loan against property documents required at the time of submitting your loan application. The mandatory documents required for LAP approval is the applicant's KYC documents, business financial statements, property-related papers, income proof, and a few more.
What is a Credit Appraisal?
Credit appraisal refers to the process through which financial institutions evaluates the applicant's repayment potential. While conducting credit appraisal, the lender assesses your income, occupation status, credit history, and a few more.
What is an Offer Letter?
An offer letter is also known as a sanction letter. The letter is an official confirmation of your loan request's approval. After evaluating your details and documents, the financial institution sends you an offer letter to your registered email id. The letter includes the maximum loan amount, interest rate, loan tenure, and other loans against property terms and conditions.
What is Disbursement?
This is the last step of your entire loan against property application procedure. Disbursement refers to the release of funds from the financial institution end to the borrower's account. Depending upon the loan against property terms and conditions, disbursement can be either partial or full.
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What is an Escrow Account?
Escrow accounts refer to the financial instrument in which the LAP funds are held by a third party on behalf of the lender and borrower involved in the financing transaction. The person receiving the LAP is unable to withdraw funds from an escrow account unless the agreed-upon requirements are met.
What is a Post-Dated Cheque?
As the name implies, a post-dated cheque is written for a future date. The financial institution cashes the cheque on the due date of your loan against property EMI.
What is Pre-payment or Foreclosure?
The term "prepayment" refers to a borrower's intention to make EMI instalments before the agreed-upon due date. Prepayment can be partial, in which the borrower pays the EMI for a few months in advance, or full payment, also known as foreclosure, in which the borrower pays off the entire outstanding amount in one go.
What is an Amortisation Schedule?
An amortisation schedule is a detailed table that demonstrates the periodic loan payments. The table illustrates the monthly principal and interest payments that the borrower must make in the form of EMIs till the loan term is completed. To get the amortisation table, you can use the loan against property interest rate calculator.
- What is APR?
The APR is referred to as the annual percentage rate. The APR reflects the true cost of borrowing since it includes fees such as interest, processing fees, legal fees, stamping fees, and a few others.
What is Credit Score?
A credit score represents the creditworthiness of the applicant. The credit bureaus calculate your credit score by looking at the number of existing loans you have, your EMI payment pattern, your debt-to-income ratio, and a few other factors. Your credit score assists the lender in determining your ability to repay the loan against property.
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What is Insurance?
Insurance in the context of a loan against property refers to the insurance of the property that the applicant is willing to mortgage with the lender. Since insurance lowers the risk of lending, applying for a loan against an uninsured property will result in your application being denied.
Loan Against Property Terminology Related to Fees and Charges
While applying for a loan against property, you may have heard multiple terms related to various charges but have been unable to comprehend them. To help you, here is a compilation of glossaries relating to LAP costs.
What are Processing Fees for a Loan?
Processing fee refers to the one-time non-refundable fee you pay to your financial institution when you take out a loan against property. The lender will charge you this fee to cover the cost of processing your loan. Since the LAP EMI does not include this cost, you will need to pay the processing charge separately.
What are Rescheduling Charges?
The lender levies the rescheduling charge when the borrower requests the alteration in the original loan against property terms and conditions. Under rescheduling arrangements, the loan's repayment tenure is restructured. The cost of rescheduling a LAP is approximately Rs 5000 plus GST. This cost, however, may vary depending on the lender.
What are Legal Charges?
Legal fee refers to the amount that a financial institution charges for verifying your property documentation. The fee also includes the cost of assessing the legal risk associated with the property to be mortgaged. In India, the legal charges for LAP range from Rs 5,000 to Rs 10,000.
What are CERSAI Charges?
The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) charge is a government-mandated fee that is imposed to protect the interests of financial institutions. CERSAI's principal goal is to prevent fraudulent financing transactions. It deters and prevents borrowers from utilising the same asset to get several loans from various financial organisations.
ALSO READ: Understanding Loan against Property Interest Rates and Charges
To Conclude
A Loan against property can be complicated at times, and mastering the common terminology is the first step toward thoroughly comprehending your loan and completing the application process. When reading the lengthy loan against property terms and conditions, refer to our handy loan against property terminology.
