Essentials of Loan Against Property

Loan against property (LAP) or mortgage is much like any other kind of loan. The way it is different is that the bank promises to give a loan, keeping your house as a security or collateral. This way even large sum of loan gets easily arranged; hence the concept is gaining popularity in India. LAP scores high on a number of points, it has easy documentation, speedy approvals, and flexible repayment options.

A mortgage, which is essentially availing a loan against property, is “the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, and existing or future debt or the performance of an engagement which may give rise to a pecuniary liability.

This means one can apply for a loan from a bank by extending the property as a collateral or security. However, as the definition states mortgage only involves “transfer of interest” and the ownership of the property remains with the borrower. Ownership transfers to the bank only in the event of default on the loan.

LAP or mortgage is attractive due to its numerous benefits. As stated earlier, the higher loan amounts are a definite attraction for the consumer, which are generally available for longer tenure when compared to conventional loans. Not only that they are also available at a discounted interest rate. Both residential and commercial properties accepted as a mortgage.

Its key benefits are:

Big Sum of money can be financed

Lower Interest rates comparatively to other loans

Payback tenure is longer, which means lower monthly installment (EMI)

Great tool for debt consolidation

Suitable to meet both business and personal needs

To validate eligibility criteria, the banks may ask for the following KYC documents

Proof of Residence

Proof of Identity

Latest Bank Statement showing income for the past 6 months

Salary slip if in a job

and necessary copies pertaining the property one is wanting to pledge

If the borrower is self-employed, then the bank will ask for the certified financial statement for last 3 years.

Whether one gets a loan or not, depends on the borrower’s credit rating along with factors like income, age, qualification, the number of dependents, spouse’s income (if any), assets, liabilities, and continuity of occupation. Once the loan is approved is it either disbursed in full or in installments as instructed by the borrower.

The borrower can pick his choice of interest ( between fixed and floating). There is also an option for part and prepayment of the loan. The loan that is extended to the borrower is based on the market price of the property pledged. However, what is important to keep in mind is that a bank always holds bank a certain amount of margin money and they generally extend a maximum of 60 -70 % of the market value of the property. This ensures that the banks are protected against any cyclical fluctuations in the real estate market and a drop in prices.

Who should opt for it?

LAP is a great one to meet your business needs. While there is no restriction on its usage, a small amount requirement can be easily met with a personal loan. While people use mortgages for funding education and even to buy/build a second property, in India most mortgage loans are still taken for business purposes.

Putting your house at stake is a serious business, so it is advisable to go ahead in this direction only after proper thought.¬†Only when the need can’t be met from any other loan, then only one should go for Loan Against Property.

LAP should not be used as a form of risk capital but should be used when the borrower knows he would definitely be able to pay back the loan in the stipulated period.

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