What is loan against property?

Date : 21/10/2020
Read: 5 mins

Read in English: What is loan against property?

Want a loan that won’t take a large chunk out of your income every month as EMI? Here’s why you should opt for a mortgage.

As the term suggests, a Loan Against Property (LAP) is a loan disbursed in lieu of a real estate asset. It comes under the ‘secured loan’ category, where borrowers can look to fund personal or business needs by offering their house property, land, or building as a collateral in lieu of a bank loan.

The loan offered is calculated off a certain percentage of the market value of the said property, and is usually between 40% and 60% (in some instances it can go up to 75%) of the asset.

Purpose of loan

A LAP can be availed of by mortgaging the property to a bank or a non-banking financial company (NBFC). It can be for a host of purposes – you could use the fund for planning a wedding, paying for a medical emergency, funding studies abroad, or for debt consolidation.

Usually a loan is sourced for business purposes or offsetting other debt obligations, as the interest component on a LAP is much lower than other categories (such as personal loans). A LAP presents the opportunity for a high-value loan without having to sell your asset, which generally tends to appreciate in market value over a period of time.

Interest rates and tenure

The loan amount and interest rate depends on multiple variables such as current market value of the property, credit profile and credit rating of the borrower, repayment track record of other debt, loans, credit cards, etc., occupation and all source of income, and other assets of the borrower.

The interest rate ranges from 8.8% to 14%, with most financial institutions averaging 10.5%. The higher the loan amount, the higher the interest obligation will be.

Borrowers have the option of choosing either a fixed or floating rate of interest. Fixed rate loans are marginally more expensive compared to floating rate plans. Also, they come with a reset clause, usually 3 years, but may vary from bank to bank.

The interest obligation in a fixed rate plan remains constant through the tenure of the loan, while in a floating plan it is periodically reviewed on the basis of the marginal cost of funds based lending rate (MCLR) and prime lending rate (PLR) of the bank or NBFC. Many borrowers prefer to go for a floating rate loan as it allows the interest obligation to move with the prevalent interest rate scenario.

Most banks offer a loan of 10 to 15 years. In some cases it can be extended even up to 25 years. The tenure is also loosely tied to the borrower’s age. Applicants older than 50 usually will not be able to score tenures exceeding 5-7 years.

Eligibility criteria

Most banks and NBFCs provide an online eligibility calculator on their website, which can help you estimate your tenure and interest obligation, if you are eligible for a LAP. The basic requirements are as follows:

The property against which the loan is sought should have a clear title in the name of the borrower.
The borrower has to be a resident Indian between the ages of 21 and 65.
For a salaried applicant, the monthly salary should be above Rs 40,000 p.m. with a minimum of three years of work experience.
For a self-employed/businessperson, the annual income should be north of Rs 3 lakh p.a. and the business should have been in existence for over five years.
The borrower’s credit score (CIBIL) should be at least 650 out of 900.
Related: How does your employer profile decide your loan eligibility?

Documentation

Each financial institution will have their own set of requirements; but this is the standard list of documents required for a LAP:

Registered sale deed (including past sale chain) and municipal tax records.
KYC documents and address proof of the applicant, including PAN and Aadhaar card.
For salaried applicants: three months’ salary slip, Form 16, certificate of employment from the current employer, and bank statement of the past six months.
For self-employed applicants: proof of ownership of business, audited IT returns for the past three years, and bank statement of the past 12 months.
Copy of credit score.
Declaration stating the purpose of the loan.
List of investments and other assets (if any).
Processing cheque and passport-size photos.

Advantages of LAP

With amounts ranging from Rs 5 lakh to Rs 5 crore, a LAP can help one source large funds, which may not be possible through a regular business or personal loan.

The borrower is free to use the asset while it is mortgaged to the bank or financial institution. At the same time, the notional value of the property continues to appreciate. If required, borrowers can avail of a top-up on the loan based on the new valuation.

Since the asset is held as collateral, the interest rate on a LAP will be much lower than that of unsecured loans. While most personal loans start from 16% to 18%, one can easily source a LAP for around 10%.

There are no pre-payment charges on LAPs with floating rate interest. At the same time, the repayment tenure is significantly greater than other personal/business loans (usually maxed out at seven years), allowing for affordable EMIs.

Do your due diligence across banks and NBFCs when shopping for a loan against property. In addition to the interest rate, check other factors such as tenure, flexibility of payment, etc. before choosing one that best fits your needs.