Loan Against Property

Loans Against Property

If you are in need of a significant amount of money and own property, then a Loan Against Property is an attractive, and relatively reasonable, credit option to consider. People often view a property as being of value only in bringing in rental income or selling at an appreciated price. It is often overlooked as an asset when raising funds for business or personal expenses. If you are in need of substantial funds, you can unlock the dormant potential of your property and raise funds at a relatively lower cost with this kind of loan.

What is a Loan Against Property?

A Loan Against Property is exactly what its name suggests – it is a loan where the bank or NBFC (Non-Banking Financial Company) lends you money and holds your property as security until the loan is repaid. Once you repay the loan in full, you get back your property. In case you fail to repay the loan, the lender can attach the property and dispose of it to recover the unpaid dues.

A Loan Against Property is a popular type of loan to take as it is one of the cheaper retail loans available. It is similar to a personal loan in that you can use the loan amount for any purpose – like debt consolidation, business expansion, education expenses, family or medical emergency. However, when compared to a personal loan, it offers a lower interest rate, and offers a larger loan amount over a longer repayment period. The key difference is that a Loan Against Property is a secured loan – the loan is secured by collateral - unlike a personal loan, which does not involve any security. This makes a Loan Against Property less expensive than a personal loan .

What is Property loan interest rates?

There are two types of interest rates:

Fixed rate of interest: The interest rate remains the same for the entire duration of the loan. Lenders usually offer this type of interest rate for a specific tenure of loan, and many may not offer this as an option at all for a loan against property.

Floating rate of interest: The interest rate changes according to prevailing market rates. Since the rate changes and is dependent on fluctuating market conditions, it is not possible to predict a typical rate.

The floating interest is linked to the Marginal Cost of Funds based Lending Rate (MCLR). The rates are typically published on the lender website and could change periodically.

How does the interest rate affect the EMI?

The floating interest rates could change on a regular basis, depending on your lender, leading to a potential change in your EMI as well. You may, however, choose to leave your EMI amount unchanged by changing the tenure of your loan. The longer the tenure, the lower the monthly EMI burden. If there is a change in the interest rate on your loan, you will be notified in advance by the bank. If you have chosen to repay your loan with post-dated cheques, you will need to pay the difference between the existing interest amount and the new interest amount separately.

Your EMI could also change if you make a partial prepayment on your loan. Full prepayment of the property loan is also possible in many cases. When making any prepayment – whether full or partial - keep in mind that it is subject to the terms and conditions of the loan regarding charges.

Benefits of a Loan Against Property versus a personal loan

Lower Interest Rate: Taking a ‘property loan’ – or more accurately a loan with property as security – is a cheaper alternative to other kinds of flexible end-use loans, like a personal loan. A Property Loan is a secured loan which means that lenders can safeguard their lending risk with your property as collateral. On the other hand, personal loans are among the most expensive consumer loans to take as they are unsecured by any collateral. Generally, interest rates on a loan against property can range from 12-16% while interest rates on personal loans can range from 15-22%. Of course, each lender will fix the exact interest rate on your loan taking into account your credit profile, prevailing market rates and other internal policy regulations.

Larger loan amount: The size of the loan depends on the value of the property. Naturally, the more valuable the property, the larger the loan amount that will be sanctioned. Typically, you can get a loan for up to 60 % of the market value of the property and this can translate into a sizeable amount of funds. The loan amount on this type of loan is far larger than the amount you would get for a personal loan. Moreover, this larger amount comes at a lower interest rate than a personal loan.

Longer repayment period: Since it is a secured loan, lenders have a lower lending risk and are willing to grant a longer repayment schedule. The tenure for a loan against property can stretch up to 15 years while a personal loan has a tenure of only 1-5 years. A loan of this kind is advisable when you have a need for a substantial amount of funds which you can repay in the medium term.

Lower EMIs: Because of the longer loan period, the monthly EMI is also smaller, meaning it is a lighter repayment burden over the entire tenure of the loan. You might be able to get a similar sized personal loan amount but since the tenure is much shorter, and the interest rates are higher, the EMIs will be much heavier.

Other benefits of taking a Property Loan

Simpler documentation process – Since most of the paperwork is done at the time of buying the property, the documentation required for a loan against property is simple. All it requires is a clean title deed with no encumbrances – i.e. there should be no existing loans, mortgages or legal complications. Any of these have a negative impact on ownership and will make it very difficult, if not impossible, to secure the loan.

Leverages an existing asset – Like a gold loan, a loan against property allows you to leverage an asset that you already own. The property could be residential (house, apartment or plot of land), commercial or industrial.

End-use flexibility – A Loan against Property gives you the freedom to spend the loan amount for any purpose you wish, much like a personal loan or a gold loan .You can use it to expand your business (buy new machinery etc.), consolidate high cost debts, fund a child’s education domestically or overseas, or even to buy another property. Because of the larger loan size and the longer tenure, a loan against property is ideal for a substantial medium to long-term expense.

What are the criteria for Loan Against Property eligibility?

Each lender has its own criteria for Property Loan eligibility. However, in general, they could include:

• Residency: Some lenders require that the applicant needs to be a resident of India. Other lenders do not have this restriction. Salaried NRIs can avail of a residential or commercial property loan subject to verification of property details.
• Minimum net income – the criteria could be different for salaried and self-employed individuals
• Minimum age: The minimum age too varies. Some lenders require the applicant to be at least 21 years of age, but more generally, the minimum age is 24 years at the time of sanction of loan. The maximum age too varies depending on the employment status – there could be different limits for salaried employees, government employee, or self-employed professionals. It typically ranges from 58 to 65 years and can even go up to 70 years with some lenders. The maximum age is the age of the applicant at the end of the loan repayment period.
• Employment status: Includes self-employed individuals, salaried employees with the government or a reputed private company, or professionals, like doctors, engineers, architects, dentists, chartered accountants, management consultants with a regular source of income. Some lenders might have restrictions on employment status, for instance, restricting a Loan Against Property only to self-employed individuals.
• Minimum loan amount: This again varies depending on the lender and which city the property is located.

The lender will make a decision on your eligibility based on the loan amount applied for, purpose of the loan, your ability to repay and the value of the property being mortgaged.

What are the documents required for a Property Loan Online?

It is necessary to get an accurate list of the required documents directly from your lender, but most lenders will require the following documents:

• Application form. Some lenders allow you to download the form from their website. The application form generally includes your personal information, contact details, details of the property (location etc.), various costs involved in buying property, the loan amount and the tenure sought, and your income details. The cheque for the processing fee is usually submitted with the form.
• Photograph
• Identity Proof (could include passport, election/voter’s ID, permanent driving license, Permanent Account Number (PAN) card or Aadhaar Card
• Address proof ( could include passport, election/voter’s ID, permanent driving license, Society outgoing bill (only from registered societies), electricity/water/telephone bill, Gas bill (pipeline connection only), Property tax bill, Domicile certificate with address issued by Municipal Corporation
• Signature Proof
• Date of Birth Proof
• IT Returns & Balance Sheet & P/L Account statement for the last 2 years.
• Business Continuity Proof for 5 years.
• Bank Account Statements for the last 6 months
• Copy of papers of property to be mortgaged

Note that there could be differences between the income documentation required from salaried employees and others.

What kinds of properties are eligible?

Residential properties are eligible, either self-occupied or rented out to a tenant. You cannot avail of a loan against property that you do not own, and that you pay rent on. It could be described as a mortgage loan against property owned.You can also avail of a LAP (Loan Against Property) for an empty unused plot of land.

You must have a clean title deed, with no encumbrances (like other loans, mortgage or litigation) which could adversely affect the title.

Commercial properties can also be used for a mortgage loan against property. Using a commercial property for loan will also require similarly clean property documentation.

If the property being mortgaged is under construction, then the bank usually disburses the loan in tranches or installments. Only interest will be levied on the amount that is already disbursed – i.e. you only need to pay interest on the amount you have received, you do not need to make payments towards repayment of the undisbursed loan amount. This is the Pre-EMI. Only once the full loan is disbursed, you will be liable to pay the regular EMI that includes both interest and principal repayment.

You will need to get all the property papers stamped according to local stamp duty laws. You will be responsible for all the costs relating to the property documents. You can ask your lender for the applicable stamp duty on your loan.

What is the maximum property loan amount and tenure?

There is no fixed minimum or maximum amount for a property loan, as this will vary with each lender. The amounts can range from a minimum of a lakh to a maximum of tens of crores. In general, you can expect to receive between 40- 60% of the market value of the property, with some lenders willing to go up to 70%. The market value is the price of the property if it were to be sold under current market conditions. The lender will decide the amount to be sanctioned based on a combination of factors including the amount required, ability to repay and the value of the property.

The tenure is also variable. These are also relatively long term loans and the repayment period is generally 15 years.

How do I pay the EMI?

You can pay your EMI in one of the following ways, depending on your lender and is gerneally similar to the payments made for a property or home loan.

Standing Instruction (SI): If you have an existing savings or salary account with the bank you have borrowed from, you can issue a standing instruction for the EMI to be deducted automatically every month from your account. If you do not have an account with the lending bank, you could open an account in order to facilitate this mode of payment.

Electronic Clearing Service (ECS): If you do not have an account with your lender, you could use this method for the EMIs to be paid automatically.

Post-Dated Cheques (PDCs): You could submit post-dated cheques for the EMI amount from another bank account. However, do keep in mind that several lenders offer only a floating interest rate on the loan against property. This means that if the interest rate is changed, your EMI could change as well and you will need to pay the difference separately. Alternatively, if you change the loan tenure, your EMI amount can continue as before even with a change in the interest rate.

Can I get a loan on property if the property is jointly owned?

Yes, you can get a loan on property even if it has multiple owners so long as all the co-owners are co-applicants for the loan.

Does the property need to be insured?

Most lenders require that the property is insured against fire and other hazards for the period of the loan. This is to keep the value of the pledged security intact in case of a natural disaster.

Is there any restriction on the location of the pledged property?

Some lenders might have a list of cities where the property needs to be located. However, it is best to check this detail with each individual lender.

Can I avail of a top-up loan on my existing LAP?

Yes, some banks will allow you to top up your existing loan once you have completed payments on your loan for a minimum period, usually six months.

How do I get the property that was pledged?

Once the entire loan amount (including interest) is repaid in full with no pending dues, the property held as collateral will be handed back by the lender. When the account is closed, you can collect the ownership documents from your lender, typically within a few weeks.

What are the consequences of defaulting on the loan?

It is always a bad idea to delay or skip payments on your EMI on any loan, whether a property loan or auto loan or personal loan. It can lead to serious legal consequences, financial loss and lack of access of credit in the future. Failing to make repayments could result in:

• Damage to your credit score
• Lack of access to loans or credit cards in the future from your existing lender and from other lenders as well
• Initiation of legal and collection action by your lender to recover unpaid dues
• Recall of the loan and sale of your property by the lender

How to apply for a loan against property online

To apply for a property loan online, you can download the application form from some of the lender websites. You can also call, sms or email the service centres to get in touch with a bank representative. Once you have submitted the application, the decision could take up to a few weeks.

How to get a Loan Against Property

If you are unsure about how to go about applying for the loan, or would like to learn more about which loan offer best suits your needs, CreditMantri can help you. We will study your loan requirement, the property details, your income and credit profile, and match you with the best possible offer on the market.