- Purpose of Loan Against Property
- Who can apply for a loan against property?
- What are the eligibility criteria for a loan against property?
- Business stability
- Credit Score
- Documents required for the loan against property
- Salary Slip
- Income Proof
- Identity proof
- Job stability
- Residential address proof
- Other documents
- How to apply for a loan against property?
- 5 Rules to Follow While Taking a Loan against property
- Don’t borrow more than you need
- Opt for a shorter tenure
- Make Timely Payments
- Take Insurance With Huge Loans
- Understand the Fine Print
- Replace High-Cost Loans
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
What are the eligibility criteria for a loan against property?
- 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.
- 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.
A credit score above than 650 is acceptable
Documents required for the loan against property
- Salary slip of last 3 months
- Bank statement of last 6 months
- ITR for the last 3 years
- Form 16
- Provident Fund Statement
- Appointment letter
- The balance sheet for the last 3 years
- Profit and loss statement
- Schedule and annexure
- Aadhaar card
- Voter ID card
- Driving license
- Fulltime job
- With the tenure of at least 3 years
- GST number
- Incorporation certificate
Residential address proof
- Registered rent agreement
- Utility Bill
- Driving License
- 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.