A house is one of life’s necessities and an invaluable asset. In terms of investment potential, one looks to it for earning rental income or selling it at a higher price for profit. But when there is an urgent requirement for a substantial capital, your house/property can also be used to quickly obtain the necessary funds, without selling it. A loan against property fetches you a high-ticket loan that you can repay comfortably.
What Is a Loan Against Property?
This is a loan type where the lender holds a borrower’s property as security or collateral, until it is fully repaid. The property papers are then returned to the borrower. Loan against property is a secured loan and offers a higher loan principal and longer repayment tenor at lower rates of interest compared to personal loans. LAP is sanctioned either with a floating or fixed rate of interest and the borrower can continue to utilise the pledged property for the entire duration of the loan.
Factors to Consider for a Loan Against Property
Before you apply for a mortgage loan, there are five points to consider that will help you understand property loans:
1. Types of Loan Against Property
- Loan against residential property: A house or land, used for residential purposes, can be easily mortgaged. It must, however, be in good condition and have no ongoing loans on it. This does not include agricultural land.
- Loan against commercial property: Any property used for commercial activity can be placed as collateral, provided it holds a clear title and has no legal disputes. Approval of the property that can be pledged as security is subject to inspection by the lender.
- Loan against industrial property: A property involved in business activity or industrial purpose can be used for availing a LAP, but the entire area must be utilised for the activity specified in the application.
2. Benefits of a Loan Against Property
- Lower interest rate: Being a secured and low-risk loan, a loan against property is available at lower interest rates. Even then, property loan interest rate differ as per the applicant’s credentials and his/her loan repaying capacity.
- Higher loan amount: When you avail of property loans, you are assured of a loan amount up to 80% of the property’s market value, which is a sizeable sum. Higher the market value of the property, higher the loan principal amount.
- Longer tenor and low EMI: Due to the pledged collateral, lenders have reduced lending risk and therefore, extend longer repayment tenor, which lowers the EMI that can be conveniently paid.
- Flexible usage: LAP can be obtained for a variety of reasons such as business expansion; funding wedding expenditures, higher education, vacations abroad, medical treatment, emergencies or any other expense.
3. Eligibility Criteria
The eligibility requirements vary across lenders and applicants must fulfil them when securing a LAP. The basic eligibility criteria are:
- You must be an Indian citizen between 25 and 70 years of age (for self-employed) or 28 and 58 years of age (for salaried).
- Applicant should have good repayment ability. S/he must have a regular source of income and minimum credit liabilities. Salaried individuals should have at least three years of work experience.
- A good credit score and credit history is essential. This will help you get faster loan approval and better loan deals.
4. Can You Secure 100% Loan Against Property?
Borrowers cannot secure 100% loan against the value of their property. The loan amount ranges between 40% to 80% of the property’s current market value. The maximum loan amount is decided by the lender and it depends on several factors like the borrower’s credit history, income, occupation, etc.
5. Documentation Requirement
The documents necessary for LAP differ with each lender. However, the standard list of documentation includes:
- Applicants must submit proof of identity, residence, income and employment
- Salaried employees must provide salary slips, IT returns, and bank statements of the last 3 months
- In case of self-employed individuals, they should furnish income tax returns of past five years, profit and loss statement, and balance sheet of the business enterprise as proof of income
- Property documents (title deed), tax receipts, ownership and registration papers, insurance papers, etc.
How to Apply for a Loan Against Property
Visit your lender’s branch office or website. Submit the duly filled application form and attach all supporting documents. The loan amount will be disbursed once the lender completes the verification process.
Foreclosure Charges on Loans Against Property
If you have a LAP at a floating interest rate, you are not subject to any additional fees and charges on prepayment or foreclosure. Those with fixed interest rates may have to pay nominal charges, which differ from lender to lender.
How Is a Loan Against Property Different from a Home Loan?
Borrowers secure home loans to purchase or construct a new house. The loan amount cannot be used for any other purpose. On the other hand, a property loan has no end-use limitation and can fund a variety of expenses.
Summing Up
The features of a loan against property make it a preferred funding option over home loans or other secured loans. But before you apply for a LAP, assess your repaying capacity with property calculator.