Loans against property have seen a steady growth and already comprise 20% of the mortgage businesses, according to a report by Nomura, a financial holding company. This segment is sized about Rs. 2.3 trillion and is expected to double to at least Rs. 5 trillion by 2019.
This is a secured loan in which a borrower can mortgage his/her property and borrow against it. The amount that can be borrowed depends upon the property and is usually 40-60% of the property value.If you too are looking for a loan against property, we bring you 5 rules to follow to get the best out of your deal.
5 Rules to Follow When Taking a Loan Against Property
If you need large lump sum amount, a LAP can be one of your bets. However, keep these 5 things in mind before you sign on the dotted line.
Don’t Borrow More Than Your Capacity
Unless you want to be paying EMIs for many years to come, don’t borrow more than your repayment capacity. As per a basic rule of thumb, your monthly EMI shouldn’t exceed 60- 65% of your net taxable income. Most banks offer LAP for 40-60% of the property value, make sure you can repay the amount you are borrowing.If your monthly installments eat into a major chunk of your income, you might have to end up compromising on other financial goals such as children’s education or retirement plans.
- Opt for a Shorter Tenure
Loans against property come with a tenure of up to 15 years which makes it tempting to opt for a lower EMI. But in the long run, you end up paying more as interest than you would have paid for a loan with a shorter tenure.Even if you cannot afford to take a loan against lower tenure currently, you can always ask your bank to increase your EMI amount every year in line with the rise in your income. Even a short increase in EMI can shorten your loan tenure and reduce the loan burden.
- Make Timely Payments
Not only you will be facing non-payment penalties, but irregularities in repayment can affect your credit score diminishing chances of taking a loan again.When it comes to repaying your loan dues, it pays to be disciplined. Any late payment will be reflected in your credit score and a bad score isn’t going to make it easy to avail a loan next time. It will also invite late penalties and you might be charged with a hefty interest on the unpaid amount.
- Take Insurance With Huge Loans
If you are taking a huge loan such as the home loan or a loan against property, it is advisable to take an insurance cover as well. In unfortunate circumstances, this will lessen the burden on your family.Usually, banks will offer a term cover that offers insurance equal to the outstanding amount. Although you can also opt for a regular term plan to cover the same as it will continue even after the loan is paid or you make a switch to another lender.
- Understand the Fine Print
The unlimited numbers of paragraphs in a loan document don’t certainly make for a good read, but it is imperative that you read and understand the fine print.
You will be surprised to find the number of additional charges that come along with your loan. There are administration charges, processing charges along with various other fees that you might not be aware of.Loans against property invite a foreclosure charge of anywhere between 2-5% depending on the lender. Make sure you understand them as well as pre-payment charges, in case your bank levies any.
- Replace High-Cost Loans
If you have too many outstanding high-cost loans and need to close them quickly, you can replace them with cheaper loans. One good thing about LAP is that it can be used to consolidate all your outstanding loans. It is a good idea to close your costly loans at the earliest. You have other options too including a loan against life insurance policies or loan against bank deposits that can help you prepay other loans. You can also utilize their other advantages such as tax refunds and maturity proceeds.
However, you should also remember that unlike other loans such as home loans, a loan against property doesn’t offer any tax benefits.
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