Have You Asked Yourself These Questions Before Applying for Loan Against Property?

You must have often heard elders stressing the value of owning property. In India, however, people only see its benefits in either earning rental income or selling it at a higher price. But it would be surprising for many to know that in urgent requirement of capital (for whatever the reason may be), the same property can be used to get you the sum, that too without selling any asset! Yes, via loan against property, you can get a handsome amount that you can comfortably repay.

What is Loan Against Property (LAP)?

As the name clearly suggests, it is a loan where the lender, lends the applicant money and holds his/her property as security until the loan is repaid. After full repayment of the loan, the property papers are returned or in case of loan default, the lender reserves the right to sell it to recover the unpaid dues. It is a secured loan and thus offers a bigger loan amount and tenure at a lesser interest rate compared to personal loans. The funds are sanctioned either via the fixed or floating rate of interest and one can get up to 60% of the market value as judged by the lender. One can continue using the property for relevant purposes during the loan tenure.

Questions you need to ask before taking a LAP

1- What are the different types of LAP?

• Loan against residential property – A house or a piece of land, which is in use for residential purposes, can be mortgaged. It does not include agricultural land. The property must be in good condition and should not have an ongoing loan on it.

 

• Loan against commercial property – Any property that is used for commercial activity can be used as collateral as long as the title of the property is clear and has no legal disputes against it. Some commercial properties could be excluded upon inspection by the lender.

 

• Loan against industrial property - The property used for a business activity or industrial purpose, can be used for the loan but the whole area must be engaged in the purposes that are specified in the application.

Also Read: 9 Questions To Ask Your Lender Before Applying For Mortgage Loan

2- What are the benefits of LAP?

There are several benefits of LAP. Some of them are:
 

• Lower interest rate: Being a secured loan that lowers the risk of the lender, it is available at a lower interest rate compared to personal loans. Though each lender checks the loan credentials of the applicant and offers a different interest rate, generally, using the property as collateral brings down the interest rate to 9-15% range from the 15-22% range charged in personal loans.

 

• Larger loan amount: The rate of the property is rising annually. So, by mortgaging property, one can get up to 60% of the property’s market value, which can be a sizeable sum and maybe even bigger than a personal loan. The more valuable the property is, the larger will be the loan amount that gets sanctioned.

 

• The longer repayment period and lower EMIs: Courtesy of the collateral, lenders have a lower lending risk and are willing to grant a longer repayment schedule. The tenure in this type of loan can stretch up to 15 years while a personal loan has a tenure of only 1-5 years. With longer tenure, the monthly EMIs also gets smaller and can be comfortably paid.

 

• The flexibility of use: A loan against property can be taken for expanding your business, meeting marriage expenditures, funding higher education or your dream vacation, for medical treatments and many other reasons without the interference of the lender.

 
3- What are the eligibility criteria for getting a LAP?

The eligibility criteria are set differently by every financial institute and they may judge one applicant differently from the other. However, you must meet these basic eligibility criteria for a loan against property:
 

• You must be an Indian citizen and at least 21 years old but younger than 70 years.
• You must have good repayment ability i.e. you should have a steady source of income and should not be carrying too many debt obligations. If salaried, one should be employed with the current employer for at least one year.
• A good credit score and history will help you secure the loan faster at a lower interest rate.

Also Read: How to Take a Loan Against Property And How Much Loan Can I Get Against It?

4- Can I get a 100% loan against the property? 
 
No, borrowers cannot get 100% value of their property. The loan against property maximum amount can range anywhere between 40% and 75% of the current market worth of your property. Furthermore, the amount of LAP differs from one lending institution to the next. Usually, you can expect to receive a sum ranging from Rs 1 lakh to Rs 10 crores. Before availing of this loan, always remember that your credit history, income, and occupation also play a major role in determining the loan amount.


5- What documentation is required for LAP?
 

• Salaried individuals need to provide proof of identity or residence, salary slips, Form 16 and six months’ bank statements.
• For the self-employed, they need to submit income-tax returns of the past three years and the profit and loss and balance sheet of business as proof of their income.
• All the applicants also need to submit photographs and processing fee cheques.
• Also, all co-owners of the property need to be co-applicants.

 

How to get a loan against property? 

To avail of a loan against commercial property, visit your preferred lender’s branch office or the website; keep all important property-related documents such as property ownership and registration paperwork, insurance papers etc. in place. Complete the application form and attach all supporting loans against property documents required. Once the lender completes the verification process, they will deposit the funds into your account.
 
               Also Read: 9 Factors Which Impact Your Eligibility For Loan Against Property

What are the foreclosure charges on loans against the property? 
 
In general, you are not allowed to foreclose on your loan within one year of receiving your LAP disbursal. However this may differ from lender to lender. After one year, the foreclosure fee is assessed as per the terms of the sanction letter. LAP foreclosure charges vary depending on the lender. When it comes to part prepayment charges, they are nil if the part prepayment is less than 25% of the principal outstanding amount. If your part prepayment amount is greater than 25%, the applicable charges are 4% plus GST.
 
How is a loan against property different from a home loan? 
 
This is one of the most often asked questions for loans against property. Borrowers take a home loan to buy or construct a new home. You cannot use your home loan funds for any purpose that is not specified in your home loan terms and conditions. A loan against property, on the other hand, gives freedom to the borrower to use the funds as per their wish. Borrowers can use the LAP funds for a variety of reasons such as medical emergencies, child education, marriage, and business expansion. There are no limitations on how it can be used. This feature of a loan against a property makes it unique when compared to home loans or other secured loan forms. 
 
               Also Read: Quick Guide to Mortgage Loans

Is a loan against property a good idea?
 
If your needs are higher and the funds you desire are for a longer tenure, a loan against property is always a good idea. This is because it comes with a lower interest rate, higher fund value, and longer repayment tenure. Depending upon your profile, the loan against property interest rate can range between 9% and 15%. 
  
The many advantages of LAP over personal loans make it a preferred choice, automatically. When in need of urgent need of funds, you can make use of your property and seek a loan against the same. It allows enough bandwidth to prepay the loan without any penalty and more notably, without losing the ownership of the property. However, assess your repaying capacity and understand the terms and conditions before entering into a loan agreement.
 
Disclaimer: The post was first published on 29 January 2019 and has been updated for the latest information, freshness and accuracy.