Loan against property has seen steady growth and already comprise 20% of the mortgage businesses, according to a report by Nomura, a financial holding company. This segment is sized at about INR. 2.3 trillion and is expected to double to at least INR. 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.

  • Loan Against Property (LAP) is a secured loan where the borrower mortgage his property as collateral to the lender. The lender can be the bank or the financial institution.
  • Use of the Loan Against Property can be done for personal or professional needs such as:
    • House renovation
    • Business expansion
    • Purchase of new machinery
    • For education
    • Marriage, etc.
  • Loan Against Property can be taken on the followings with Loan to Value as per the category of the property
    • Residential property with 65% to 70% of Loan to Value
    • Commercial property with 55% to 65% of Loan to Value
    • Industrial property with 40% to 55% of Loan to Value
  • Usually, there is a fixed percentage of the property value known as loan to value (LTV) and it differs from bank to bank.
  • In the loan against property, the value of the loan is 40% to 70% of the property value.
  • The possession of the mortgaged property will remain with the borrower. However, the lender will keep the papers of the property but the borrower can use the property.
  • The interest rates on the loan against property are comparatively lower than the personal loan. Whereas personal loans can be the unsecured loan and the loan against property is a secured loan.
  • Loan Against property has a flexible loan tenure which depends on the age of the borrower which can be a maximum of 15 years.
  • Processing fees for the loan against property will be 0.50% to 1% of the total loan amount.
  • The loan amount is based on the
    • Purpose of the loan, and
    • Type of the property

Purpose of Loan Against Property

  • Investment in technologies
  • Investment in business
  • Purchase of raw materials
  • For working capital requirement
  • Investment in property
  • Expansion of the business
  • Acquiring new machinery

Who can apply for a loan against property?

  • Salaried Individual
  • Self-Employed Individual, and
  • Professionals

What are the eligibility criteria for a loan against property?

Age

  • The minimum age should not be less than 21 years
  • The maximum age should not be more than 65 years at the time of maturity which can extend to the age of 70.

Business stability

  • The salaried person should have minimum experience of 2 to 3 years
  • In the case of self-employed, there should be a profit of at least the last 3 years.

Credit Score

A credit score above than 650 is acceptable

Documents required for the loan against property

Salary Slip

  • Salary slip of last 3 months
  • Bank statement of last 6 months
  • ITR for the last 3 years

Income Proof

  • Form 16
  • Provident Fund Statement
  • Appointment letter
  • The balance sheet for the last 3 years
  • Profit and loss statement
  • Schedule and annexure

Identity proof

  • Passport
  • Aadhaar card
  • Voter ID card
  • Driving license

Job stability

  • Fulltime job
  • With the tenure of at least 3 years
  • GST number
  • Incorporation certificate

Residential address proof

  • Registered rent agreement
  • Passport
  • Utility Bill
  • Driving License

Other documents

  • Employment contract
  • Appointment letter
  • Check of fees in favor of the bank

How to apply for a loan against property?

  • Loan Against Property can be provided by the
    • Bank, or
    • Other financial institution
  • Go to your bank to provide the required information along with your documents.
  • Get done with the paperwork and all the formalities.
  • Read all the clauses of the loan carefully.
  • Decide the amount of loan, the tenure of a loan, and rate of interest.
  • After all the formalities lender will provide you a loan against the property.

5 Rules to Follow While Taking a Loan against property

 If you need a large lump sum amount, a LAP (Loan against Property) 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 you need

  • Unless you will 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.
  • 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 rising 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 on 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 a 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. However, you must 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 to 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 Loan Against Property 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. 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 home loans, the loan against property does not offer any tax benefits.

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