Loan Against Property – What you Must Know?

Every individual has future plans and ambitions that require huge investment of time, money and efforts. These are very critical because they help you achieve your academic, professional or personal goals.

Given the huge investment or initial expenditure most people think “Where will I get the money for this?”. Some people also think “Should I sell my property?”, “Should I sell all my jewels and investments?”In most cases there is a fear or nervousness about losing or compromising something. However if you have a property (residential) you can mortgage the same and get a loan.

Advantages

The loan is secured
You don’t have to sell the property
You can continue to live in the same premises
The rate of interest will be affordable since the loan is secured

Purpose of Loan

The loan amount could be used for any purpose which can include

For Education/Higher studies in India or Abroad
For marriage
For vacation/holiday
For medical treatments
For business/commercial venture (for starting up or expansion)
Depending on the end-use some documentation and procedures can vary. In some cases banks monitor the end use of funds, but there are cases where you have the flexibility to use the funds as per your choice.

In any case you not be allowed to utilize the funds for any illegal activities or for uses that are not permitted by the bank/financial institution.

Loan Amount

The amount of loan sanctioned is at the discretion of each bank, so this can vary dramatically from one bank to the other. However, most banks give loans up to a maximum of 60% of the property value (there could be some ex

If your property value is Rs.50 lakhs you will be eligible to get up to a maximum of Rs.30 lakhs – note that the bank is free to decide on a lower loan amount. The bank will try to assess your loan application and eligibility based on its own internal criteria.

Tenure

Maximum tenure of up to 180 months (15 years) could be provided. Given that this is against a property such long tenure is possible.

Rate of Interest

This is highly variable. This would be relatively lesser compared to personal loans. As per some informal estimates, the interest rate figure is roughly in the range of 12-18% (It is advisable to contact the lender/bank directly for more details).

This is only an indicative range and can change from time to time and is highly dependent on each bank’s internal policies.

Criteria

Although this is variable across banks, most lenders look for a few attributes of financial or creditworthiness, which include:-

Your income (salary, business, etc.)
Value of the property mortgaged
Payment track record of other loans, credit cards, etc.
Income tax returns

Evaluation & Disbursement

The lender or banker will perform a technical and legal feasibility study and even visit the property premises for inspection. They may also ask for details of property documents, property taxes receipts, etc. to ensure that everything is on track.

Documentation for Individuals

Application form
Identification and Address proofs
Income proof: (salary slip & Form 16)
Bank statements for last 6 months
Processing fee

Documentation for self-employed or businessmen or businesswomen

Application form
Identification and Address proofs
Income proof: (salary slip & Form 16) Last 3 years Income Tax returns (self and business)
Last 3 years Profit /Loss and Balance Sheet
Education Qualification and Certification of Business Incorporation/Existence
Bank statements for last 6 months
Processing fee cheque

Tips on Documentation

Although documentation might look mundane and boring, these will be critical documents that are used by the lender to verify your credentials. So ensure that you have all required documents in place and get them organized and submitted on time to aid quicker processing.

Banks and lenders keep a close watch on your regular transactions such as EMIs, bill payments and other recurring transactions. Ensure that these transactions are within reasonable limits.

If you have too many loans (one car loan, personal loan, jewel loan, etc.), then it’s a good idea to close a few loans before you apply for Loan Against Property (LAP).

Issues

If you are unable to pay the loan the bank can take possession of the property. This is the only issue or disadvantage. However, if the borrower (you) are not able to pay most banks would be open to discuss or provide some time or alternate solutions instead of taking possession of the property.

If you find yourself in a crisis-like situation you can work out a mutually workable solution with your bank. But if your financial situation does not improve at all then the only option would be to sell the property to pay the loan or alternatively you can liquidate other assets to pay off your loan.

To sum up LAP (loan against property) has its own pros and cons, so you need to be clear about the end use and repayment of the loan and what you plan to do with the funds. This requires prior planning and budgeting to ensure timely payments without compromising on other regular living expenses.

For instance if you are planning to take the loan for education, see how you can plan your repayments out of your existing income, because in this case the loan repayment terms might differ from those of a normal education loan (with moratorium period).

In case you are using the funds for business, make sure that your income from business is sufficient enough to support the EMIs. If returns from business are not good enough you may be stretching your budgets.

Although the bank/lender check these aspects, it is important for you to have a check and also have some back up funds or cash in case you are not able to make regular payments. This is where an emergency savings equivalent to 6-9 months of expenses comes to your rescue.

Those who have a property and need funds for higher education, business or other needs can definitely explore the possibility of taking a loan against it to fund their ambitions and achieve their goals.