Among a host of loan options that are provided by banks, a relatively popular product among the products offered is the Loan against property or mortgage. The product clicks easily with the borrowers because it generally allows one to borrow a relatively large sum of money for any kind of need. It also generally has an easy documentation, speedy approvals and also flexible repayment options.
According to the Transfer of Property Act, 1882, a mortgage, which is essential in availing a loan against property is “the process of the transfer of an interest in the specific immovable property in order to secure the payment of money which is thus advanced or it is to be advanced by a way of loan, and also to the existing or the future debt or the performance of an engagement which thus may also give rise to a pecuniary liability.
This means that one can apply for a loan from a bank by extending the property as a collateral or as security. However, as the definition states that mortgage only involves “transfer of interest” and the ownership of the property which remains with the borrower. Ownership thus transfers to the bank only in the event of default on the loan.
Loan against property or a mortgage is thus popular because it has some of the perceptible benefits. Higher loan amounts are also generally available for the longer tenure when it is compared to the convent.
Its key benefits are that:
It is Good when the borrowers avail larger amounts
The of loan tenure is longer, which thus means that there is lower EMI
It is a Good tool for debt consolidation.
Funds can thus be used for business as well as personal needs.
In order to fulfill the eligibility criteria banks generally demand proof of residence, proof of identity, latest Bank Statement where one can show a salary/income for the past 6 months, and also a salary slip if employed, and also relevant copies that are related to the concerned property which the borrower wants to pledge. If the borrower, however, is self-employed, then generally the certified financial statement which is for the last 3 years is needed.
Loan eligibility thus usually depends on the borrower’s credit rating along with the factors like income, age, qualification, the number of dependents, spouse’s income (if any), assets, liabilities, and also to the continuity of occupation. Once the loan is approved then is it either disbursed in full or in installments as it is instructed by the borrower. The borrower can thus often choose between the fixed and floating rate of interest and it is generally that there is an option for the part and also prepayment of the loan.
The loan that is thus extended to the borrower is however based on the market price of the property that is pledged. However, what is important in order to keep in mind is that a bank always holds a bank certain amount of margin money and them then generally extend a maximum of 60 -70 % of the market value of the property. This, however, ensures that the banks are protected against any kind of cyclical fluctuations in the real estate market and also for the drop in prices.
Who should opt for it?
Mortgage or loan against property is a particularly popular when it comes to the needing of money for your business. While there is, however, no restriction on using it for personal needs, but, if the amount is small, then a personal loan can also make much more sense.
While people use loan against property for the purpose of education and also even to buy/build a second property, then most mortgage loans are thus taken for the business purposes. This is thus especially helpful if the business is thus in need of emergency cash at the lucrative interest rates.
Therefore it is always risky in order to put the property of the borrower at stake, especially if it’s his house. This form of loan is thus also not advisable if the borrower is starting up and there is a substantial amount of risk which is involved in his business. Loan against property thus should not be used as a form of risk capital, but it should be used when the borrower knows that he would be able to service the loan or to repay it before the stipulated period.