Loan against property (LAP) refers to is a loan that is given or is disbursed against the property. The loan is disbursed at a certain percentage of the market value of the property and is usually around 50% – 90%. Loan against property is the part of the secured loan category where the borrower issues a guarantee by using the property as a security. Loan against property is the loan against the mortgage of the property. Loan against the mortgage of the property can be taken for many purposes such as
- Expansion of business
- For the purpose of the wedding
- Medical requirements
- Child’s education
- Short term fund mismatches
- In order to arrange funds, etc.
LAP is the better way to raise money. In the comparison of the unsecured loan, it is more reliable and easy to avail. If in case the borrower fails to repay the loan, then the possession of the property will be taken of the bank or financial institution.
Who can be applicants and co-applicants in Loan Against Property?
- All co-owners of the property who are the co-applicant in the Loan Against Property.
- Partnership firm
- Limited company
- Society registered under society act
- Non-profit company or organization
- Applicant should be the age of 25 to 65 years
Property mortgaged for Loan Against Property
All the property which can be mortgaged for the loan against property should be self-owned
- Residential Property
- Self Occupied the Residential property
- Rented residential property
- Any piece of land
- Commercial Property
- Rented commercial property
The property which can not be funded for Loan Against Property
- The property which is not self-owned
- Vacant plot
- The property which is under construction
- Agriculture land and building
- Cinema hall
- Industrial land
Norms related to property for Loan Against Property
- Insurance of the property is necessary
- It should be in the minimum area prescribed by the bank. The minimum area is different for
- Residential Properties, and
- Commercial Properties
- The property must have minimum market value according to the norms. The minimum value is different for
- Metro cities, and
- Non-metro cities
- Market valuation of the property should be assessed on the bases of technical reports.
Loan to Value ratio (LTV) and Fixed Obligation to Income Ratio (FOIR) for LAP
Percentage of LTV
- 70% in case of the residential property
- 60% if the property is non-residential. However, percentage vary from bank to bank.
- Fixed Obligation to Income ratio is applicable in the way of standard home loan norms.
Interest rate and tenure of the Loan Against Property
- In the comparison of the other loan, the interest rate of the LAP is higher.
- However, the interest rates are decided by the banks and other financial institution.
- Interest rates on the loan against property differ from bank to bank and other financial institution.
What should be the eligibility criteria to get Loan Against Property?
There are following eligibility criteria in order to get the Loan Against Property. However, the eligibility criteria differ from lender to lender.
- The market value of the property should be at least higher than the minimum amount.
- Existing Loans
- The credit report or CIBIL report
- Credit card statement
- Bank Statement
- Income of the borrower, and
- Other financial statements.
What is a Loan against Property and How is it different from a Home Loan?
- The two loans that are known as home loan and loan against property are poles apart.
- A Loan against Property is called as a multi-purpose loan.
- The end-use of this could be funding for
- Education, or
- Expanding your business, etc.
- The collateral (secured asset) for this kind of loan is a property which is thus already in existence or either a plot of land.
- A Home Loan, on the other hand, is a loan which is taken only for the purpose of buying a residential property.
Why should I take a Loan against Property?
Your assets like gold, FD etc. can thus be used as collaterals for loans. Real Estate is considered as a valuable asset. You can however also leverage this asset and obtain the necessary funds.
Should I take a Personal Loan or a Loan against Property?
A Personal Loan is also an all a -purpose loan. However, in this, no collateral is required for a personal loan. If you have a property, then you should leverage it for the funds. A Loan against Property thus scores over a personal loan for the following reasons:
- A Personal Loan is, however, available at steeper interest rates (around 20%) as it is compared to a Loan against Property (around 15%)
- A Personal Loan is always available for shorter periods (1-5 years) while a Loan against Property is thus usually available for longer tenures of up to 15 years.
- The Processing fee is lower for a Loan Against Property (around 1%) as and when it is compared to a Personal Loan (around 2.5%)
Can a self-employed person avail of a Loan against Property?
Yes, Both the salaried and the self-employed applicants can thus obtain a Loan Against Property.
Can NRI’s get a Loan against Property?
Yes, Most of the banks are thus willing to offer loans to the salaried NonResident Indians (NRIs). They should also live in select countries and they should work for the reputed organizations.
Do you need to specify the purpose for which you avail a Loan against Property?
- Most of the banks do not ask the borrower to specify the purpose for which the borrower takes a Loan against Property, up to a particular limit.
- Above that, they also might require the borrower to provide an undertaking that the loan is not for a speculative or an illegal purpose.
Can a Commercial Property act as collateral for Loan against Property?
Yes. You can take a Loan against Property by providing either a Residential or a Commercial Property as collateral. You can also take a loan against a plot of land by keeping it as collateral.
What is the quantum of the loan I can get?
- For a Loan against Property, around 60-80% of the market value of the property is provided as collateral and this depends upon the bank which the borrower opts for.
- Factors like the borrower’s
- Job stability
- Spouse’s financial health
- Other loans in your name also play a crucial role in order to determine the loan amount.
What are the taxation aspects?
- Unlike a Home Loan, there are no tax incentives which are available on the EMIs in the case of the fact that the Loan against Property has been availed by a salaried person.
- A businessman, however, can claim the tax deduction on the entire interest on the amount which is paid on the loan if he can prove that the loan funds were used in order to improve his business.
How would my property value be assessed?
The bank shall always determine the value of the property after conducting a formal valuation process.
What are the documents that are required for applying for a Loan against Property?
The documents that are required differ for a salaried and for a self-employed person:
A Salaried applicant needs to submit:
- Application form with a photograph
- An Identity and an Address Proof
- .The Latest Salary Slips
- Form 16
- .Bank Statements of the Last 6 months
- Processing fee cheque
A Self-Employed applicant thus needs to submit:
- An application form with a photograph
- An Identity and an Address Proof
- Proof of business existence & the Education Qualifications.
- Last 3 years Income Tax Return
- Last 3 years P&L and also Balance Sheet
- Bank Statements of the Last 6 months
- Processing fee cheque
How much time does the Bank take to disburse the loan?
Banks usually take around 2 weeks for the purpose of disbursing the Loan against Property once all the documentation process is completed.
Do I need to ensure the property?
Yes. The banks usually require that the property is to be insured against flood, fire, flood, earthquakes etc. during the tenure of the loan.
How can I repay my loan?
You can repay your Loan against Property through the process of Equated Monthly Installment (EMIs). It can thus be paid either through Post Dated Cheques (PDC) or through Electronic Clearance System (ECS)
Can I prepay my loan?
Yes. The Loan against Property can, however, be pre-paid prior to its schedule. Commercial Banks thus cannot charge foreclosure charges on any of the floating rate term loans that are sanctioned to its individuals as per a recent Reserve Bank of India (RBI) directive.
Can I make part pre-payment of my loan?
Yes. You can also make part pre-payments of a minimum amount.
How is the interest calculated?
Interest rates are usually thus calculated on a monthly or on daily reducing balance method, and it depends on the bank.
What happens when the property is jointly owned by more than one person?
All the co-owners of the property will thus automatically become the joint applicants of the Loan against Property.
Can I take a loan against a house I have given on rent?
Yes. All that matters is that you are required to have a proper title deed and also other ownership documents. It thus doesn’t matter whether you live in the house or you give it on rent.
Does a bank check my Credit Score before giving me a Loan against Property?
Yes. Even though a collateral is provided, the banks would check the Credit Score of the applicant for his repayment history in case of the Loan against Property. A CIBIL score over 750 is thus usually considered as a good enough credit score for the process of loan approval.
Thus in the case of a loan against any other asset like shares or gold, the bank would always sell the pledged asset in order to recover its dues. That’s a lower risk which the borrower is required to take as compared to losing a home. A Loan against Property could thus be a good alternative for you if you are confident enough of repaying your dues on time.