You need Rs 20 lacs to fund a wedding in the family. You approached a few friends/relatives for help. They chipped in but you are still Rs 15 lacs short. You approached a few banks and NBFCs. However, your requests for a personal loan of Rs 15 lacs were politely declined, primarily because you are self-employed. It is not that you are light on assets. You have a few residential and commercial properties that you inherited from your father. You are contemplating selling the one of those properties for the wedding. An emotionally difficult decision for you. While discussing the issue with a friend, he tells you about Loan Against Property (LAP). He tells you that under loan against property, you can mortgage an existing property and get a loan against it. Exactly what you were looking for. You want to know more about loan against property (LAP). Let’s find out.
What Is Loan Against Property (LAP)?
LAP is a secured loan where you mortgage your residential or commercial property and borrow money against it. So, you mortgage one of your residential or commercial properties to the bank and the bank offers you a loan against it. Since it is a secured loan, the interest rate might also be lesser than the interest rate for a personal loan. The bank/NBFCs may have declined your request for a personal loan but may approve loan against property since they have security. And you don’t have to sell the property and bank’s right over the property goes away after you repay the loan.
How Is LAP Different from Home Loan?
You take a home loan to purchase a house. In case of LAP, you already own the property. You mortgage the property and use the loan amount for some other purpose. You may choose to opt for LAP for:
- Education
- Medical treatment
- Wedding
- Business requirements
- Debt consolidation
- Any other purpose
Typically, banks don’t put restriction on how you are going to use these funds.
How Much Loan Can I Get?
That will depend on the value of the property, as assessed by the lender. Do note assessed value of property may be different across lenders. Moreover, you will get only a percentage of the market value as loan. Typically, lenders limit themselves to 50-70% of the market value. Lenders won’t just rely on the market value of the property. They will also look at your repayment ability before offering you the loan.
To sum up, following are the parameters bank/NBFC will look at before offering you LAP:
- Market value of property
- Legal and technical clearance of the property title
- Your Age (both minimum and maximum age may be specified)
- Your employment status (salaried or self-employed)
- Your cash flows (salary or annual income)
- CIBIL (credit) Score. Higher the better.
- Existing assets and liabilities (loans)
The bank will make its own assessment of your repayment ability. However, you know about your repayment ability far better. Make sure you have the ability to repay the loan or else you risk losing your property.
What Are the Documents Required to Apply for a LAP?
Though the exact list of documents will vary across banks and NBFCs, I will list down common documents required by banks:
- Identity and address proof of the borrower
- Salary slips, Form-16 (for salaried)
- Bank Statements, Income Tax Returns, Certified Financial Statements (for self-employed)
- Property Documents
What Are the Benefits?
- You can get loan against both residential and commercial property.
- It is a secured loan. Hence, you can get this loan at a lower rate as compared to a personal loan. Interest rates for LAP range between 11%-15% p.a. across lenders.
- You can get bigger loans with LAP. Personal loans won’t go beyond Rs 5-10 lacs. With LAP, you can get loans as high as Rs 10 crores.
- For many of us, personal loan may not even be an option. Banks/NBFCs may not be as comfortable offering a personal loan to a self-employed person (as compared to a salaried individual).
- You get longer repayment schedule. Some lenders offer repayment tenor of up to 15 years. Tenor of personal loans won’t be more than 3-5 years.
- You may get the flexibility to receive the loan amount as lump sum or as an overdraft facility.
- There is no prepayment penalty for individual borrowers in case of floating rate loans. Please note prepayment penalty may be applicable if you have opted for a fixed rate loan.
Any Tax Benefits for Repayment of Loans Against Property?
There are no tax benefits.
What Are the Other Charges Involved?
Loan interest is not the only cost that you incur on taking the loan. There are many ancillary charges such as processing fees, registration charges, valuation charges, legal charges etc. Do keep these costs in mind while finalising the lender.
What Should You Do?
- As with any loan, do not borrow just because you can.
- Be sure about your repayment ability before opting for LAP. If your repayment ability is suspect, you may just be better off selling your property than taking loan against it. By selling the property outright, you will save on interest cost and many ancillary charges. Do note this is not a generic advice. Decision may depend on many parameters such as market conditions and emotional attachment with the property.
- Though loan against property is likely to be better than personal loan in terms of interest rate, do shop around for personal loan rates too. You might just find a close quote for personal loan too.
- If you plan to take loan for daughter’s (or son’s) education, you can ask her to opt for education loan. Not only is education loan likely to be cheaper, she will also get tax benefit for education loan repayment.
- If you plan to prepay the loan much ahead of the schedule, it is better to opt for floating rate loan.
- Shop around for lower interest rate, processing fee and other ancillary charges.