Financial emergencies and setbacks can arrive anytime. That moment, you may have only your investments to liquidate or savings to break to arrange the necessary finances. However, there is another route, which is a loan on property that is self-owned. A loan against property (LAP) is a secured loan. The bank/NBFC provides a loan amount against the owned property. You can usually get up to 50-75 percent of the property’s current value.
Banks and NBFCs have a conditional ownership over the property of the borrower, until the loan is repaid in full. So, if you take this loan, you are eligible to get a loan amount against the property’s value, but the property is kept as collateral with the lending institution. The property papers and documents will be withheld, but you will still remain the lawful property owner through the tenure and after repaying the loan as well.
The amount received can be used for any purpose and personal expenses. As real estate value increases over time, choosing LAP can help raise a big loan amount that can be utilized for any small or big expense such as medical treatment, wedding, education, travel tour, expanding business etc.
Here are few important things to know if you wish to take a loan on property.
- Evaluation of the Property
A loan against property can be provided against residential, commercial, and industrial property, even on a self-owned property that is rented out. A piece of empty land may or may not qualify for this type of loan. If the property is co-owned, then all legal owners become joint applicants of the loan. On receiving the loan application, the financial institution sends an appraiser to the property to evaluate the same as per market’s value.
Banks and non-banking financial institutions usually sanction loan within a few days after judging the property’s condition, age, and legal status. After these processes are completed, a loan amount is finalized. You can take either the entire loan amount offered, or up to any amount, which is within the limit sanctioned.
- Loan-to-value (LTV) Ratio
It is always wise to compare the LTV offered by lending institutions before choosing the preferred one. Private sector banks can offer up to 75% of the property’s current market value, while public banks can offer up to only 65%. Variation in LTV stems from the bank/NBFC internal rules and property evaluation criteria.
LTV for residential property is more than that of commercial property as collateral. It is so because lenders think that borrowers are inclined and dedicated more towards their personal and residential property, as compared to commercial one, thus the latter becomes a riskier lending option for loan providers.
- EMI, Tenure, Rate of Interest
If you are applying for a loan against property online on the loan provider’s official website, you can use free-to-use financial calculators such as loan eligibility calculator and loan EMI calculator to calculate the actual EMI based on the loan’s repayment schedule. The interest rate for LAP ranges between 12% and 15%, but it may change as per a lending institution’s norms. The tenure of the loan is from 5 years to 15 years. You can choose to receive either a lump sum amount or take an overdraft facility.
- Eligibility Criteria
The criteria for eligibility vary from a financial institution to another. However, there are a few common requirements regarding a borrower’s existing debts, income, repayment track record for previous loans and credit cards, mortgaged property’s current market value etc. The borrower’s age, financial position, employment status, and credit score also help lending institutions in deciding the loan amount to be sanctioned.
Basically, the bank/NBFC should be convinced that the borrower (you), can repay the debt while still employed, and this is why there is a maximum and a minimum age set for applicants, until loan maturity. For salaried individuals, maximum age to apply and pay in total the loan is 60 years, while the same is 70 years for self-employed individuals.
- Documents Needed to Apply for Property Loans
The documents needed by banks/NBFCs offering LAP are as follows:
- Duly filled loan application form with recent passport-sized photograph
- Current residence proof, cheque for processing fee
- Government recognized valid photo identity proof
- For salaried individuals: latest salary slips of last 3 months, bank statement of last 6 months, last 3 years IT returns.
- For businesspersons and self-employed professionals: certificate of educational qualifications and proof of business existence, bank statement of last 6 months of both personal and business accounts, last 3 years IT returns (business and self), business profile, last 3 years P&L statements and balance sheets.
LAP has no tax benefit and interest payment starts when the loan is disbursed. The lending institute performs a few mandatory checks before the loan is processed, thus the processing time is greater than other secured and unsecured loans. However, a property loan is one of the best ways to arrange funds, especially if the property market is bullish.
If you are unable to completely repay the loan, the financial institution can take possession of the property mortgaged to auction it and recover the amount you owe. Repayment defaults affect your credit/CIBIL score. It also invites additional penalty charges.
Thus, you should ideally assess your repaying capacity and manage finances accordingly to repay the loan in time. A loan on property is a suitable financial product cut for your funding needs, so you can always choose it and get over financial challenges.