Before Applying for Loan Against Property (LAP)

Financial setbacks are like uninvited guests – they always turn up unannounced at the wrong time and derail your plans. A lot of us imagine this scenario in our heads and create hypothetical funds or options that we are sure will help us in case of such an eventuality. 

Many of us might not have that fund ready and need to fall back on options that are always not so pleasant – like taking a loan from a relative or a friend. 

So how do you arrange for money at these times of crisis? Let’s take a look at one of our recommended options- the loan against property.

We are all aware of the high interest of personal loans but often we find ourselves out of choices. This is where a loan against property (LAP) becomes a viable option. 

Also known as Mortgage Loan, LAP is categorized as a secured loan and disbursed against the security/guarantee of the borrower’s legally owned property. 

Although loans against property are not at par with housing loans as far as competitive interest rates are concerned, they are definitely cheaper than personal loans.

In case of loan against property, lenders have conditional ownership over the borrower’s property until the loan is repaid in full. 

Therefore, the borrower can obtain a loan amount commensurate to the value of the property less than the lender’s margin. Additionally, these loans offer larger sums at lower interest rates and longer repayment tenures. 

The borrower still remains the lawful property owner throughout the loan tenure and can choose to repay the loan at a pace in line with his/her financial standing and situation.

Further, unlike home loans, loans against property can be used as the borrower’s wishes. With constantly escalating real estate values, this loan helps raise big sums, while they are also suitable for short-term needs like medical treatment/emergencies, children’s education/marriage, starting/expanding business, etc.

If you are considering taking a loan against property, here are some important things you must know:

Property evaluation
Loan against property can be taken against a self-occupied property or a residential property that has been rented out, as long as the borrower is the lawful owner. 

Real estate that qualifies for a LAP includes a house, a commercial property, or a piece of land. Further, if a property is owned by more than one person, all legal owners need to jointly apply for the loan against the co-owned property.

On receiving an application for a LAP, the lending institution sends an appraiser to evaluate the plot or home’s market value. Non-banking financial companies and banks typically sanction only a specific percentage of the property’s total market value, usually 40-60%. 

Before quoting a final figure, financiers also take into account the property’s age and overall condition. 

To ensure that the loan is approved, it is advisable to ascertain that the property is free from previous liens and is completely owned by the applicant(s).

Loan-to-value (LTV) ratio
To secure a good deal, it is imperative to compare various lending institutions in terms of the loan-to-value (LTV) ratio offered by them. Private sector banks may offer up to 75% of the property’s value as a loan, while public banks offer up to 65%. 

This variation is attributable to the way in which the property is evaluated by financial institutions or their internal rules, and this restricts the offered LTV.

Further, if the borrower pledges his/her commercial property as collateral, the LTV offered is usually lower than in the case of a residential property. 

This is because banks opine that borrowers are more dedicated to saving their residential property rather than commercial, and this naturally lowers the bank’s perceived risk.

LAP Eligibility criteria
Though this may vary from bank to bank, some common factors that all banks consider are the borrower’s income, debts, savings, repayment track record (for credit cards, previous loans, etc.); and the market value of the mortgaged property. 

Apart from this, the borrower’s employment status, age, financial standing, and credit score also play a key role in determining the loan amount that is sanctioned. 

Lenders prefer that the borrower is paying off the debt while still employed – this is precisely why the maximum age for the maturity of LAP for a salaried individual is set at 60 years (retirement age in India) and for self-employed individuals, it is 70 years.

Interest rates, Tenure, EMIs
The interest rate on a LAP ranges from 9-15% per annum depending on the lender. The tenure of a loan against property can be between 7-15 years. 

The borrower can choose between a lump sum and an overdraft facility. Financial institutions usually have an online LAP eligibility calculator, using which you can calculate the exact EMI amount based on your loan repayment schedule.

Documents required
The key documents required by most banks/financial institutions offering loans against property are usually the same, however, there may be some minor variations from one lender to another. Common documents are mentioned below
1. KYC documents of the borrower
2. Income proof of the borrower
3. Legal documents of the property

Did you know?
Loan against property (LAP) provides no tax benefit to the borrower and the liability of interest payment starts as soon as the loan is disbursed. 

Moreover, loan against property requires quite a few checks to be made by the lender, therefore, the processing time is almost as long as in the case of a home loan.

A loan against property is one of the best ways to raise money especially when the property market is bullish. However, if the borrower is unable to pay off the loan on time in full, the financial institution is authorized to take possession of the mortgaged property and auction it off to recover the loan owed. 

Like any other loan, repayment defaults also negatively impact the borrower’s credit/CIBIL score, not to mention the penalty that will be charged on loan repayment. It is therefore prudent to thoroughly assess one’s repaying capabilities and understand all associated conditions before opting for a loan against property.

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