Explained: Loan against property and how to get the best of it

A lender would verify all the property related documents while evaluating an LAP application.

Just like personal loans, or loans with securities or gold and jewellery as collateral, lenders do not put any end-use restriction on the proceeds of a loan against property (LAP), barring speculative or illegal activities. Owners can leverage their residential or commercial property or even plots to finance any personal or business requirement. This feature makes LAP an attractive option for property owners for availing of big-ticket loans without losing the title to their property.

Here I will discuss some important factors that one needs to consider before applying for an LAP:

Interest rate

The rate of interest for LAP usually starts from 9.50 percent per annum. The final interest rate offered to an LAP applicant would depend on his credit profile, and the nature and features of the  property in question. Some lenders tend to offer lower interest rates for loans against self-occupied residential property than those availed against commercial property. Many lenders also consider the credit score, loan-to-value (LTV) ratio and tenure of their LAP applicants while arriving at the interest rates. Hence, LAP applicants should compare the interest rates of as many lenders as possible. The best way to do this is to visit online financial marketplaces that  list LAP offers from multiple lenders based on the applicant’s credit profile and property features.

Repayment tenure

Most lenders offer repayment tenures of 15 years for LAP, with many offering longer periods of 20 years. This puts LAP  in an advantageous position with respect to other loan options that are offered without end-use restrictions.

For example, most lenders offer a maximum tenure of three years for gold loans while personal loans are mostly offered for a maximum tenure of five years. While lenders offer 15-year tenures for top-up home loans, the final tenure offered to an existing home loan borrower is usually capped at the residual tenure of the underlying home loan.

Thus, existing home loan borrowers nearing the end of their loan tenure but having other properties as well can consider LAP to raise funds for their requirements.

While choosing their LAP tenure, applicants should factor in their repayment capacity and contributions towards their unavoidable financial goals. Those having lower repayment capacity should opt for longer tenures to increase their loan eligibility. As choosing longer tenures would incur higher interest cost, applicants should try to make prepayments to reduce their overall interest cost, as and when they have surplus funds.

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Loan amount

Lenders usually finance up to 75 percent of a property’s market value as LAP. However, the final sanctioned amount would also depend on the applicant’s repayment capacity, and the location and age of the property, its surrounding infrastructure, etc. As opting for a longer tenure reduces the EMI or equated monthly instalment, applicants with lower repayment capacity should opt for longer tenures to avail bigger loans.

Processing time

A lender will verify all the documents related to the property while evaluating an LAP application. The lender will also undertake a technical study to confirm the property ownership and its market value. These evaluation-related processes are complex and time-consuming in nature, meaning lenders take at least two to three weeks to approve and disburse LAP. Thus, LAP may not suit individuals seeking quick loans to deal with financial exigencies.

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Processing fees

Lenders usually charge processing fees of 1-2 percent of the LAP amount. As such loans usually involve larger amounts, the processing fee incurred too can constitute a significant amount. Hence, prospective LAP applicants should compare the processing charges of as many lenders as they can while evaluating LAP options.

Prepayment charges

Reserve Bank of India guidelines do not allow lenders to charge prepayment charges on LAP at floating interest rates, but this does not hold true for such loans at fixed interest rates or those at floating rate given to non-individual borrowers. As prepayment charges in the case of fixed-rate LAP can constitute a significant amount, those planning to make prepayments for reducing their interest cost should prefer advances offered at floating interest rates.

Credit scores

As lenders can sell the mortgaged property in the event of a default in this kind of a loan, they are usually more lenient with credit scores while evaluating LAP applications. As a result, applicants unable to avail personal loans due to a low credit score or charged higher interest rates for it can consider LAP for meeting their financial requirements.

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Availability of overdraft facility

Many lenders offer the option of availing LAP as an overdraft facility. Under this, a credit limit is set for the LAP borrower from which he or she can withdraw as per their financial requirements. The lender charges interest only on the amount drawn, not on the sanctioned credit limit, and till its repayment. The borrower can make ‘n’ number of withdrawals and repayments as per his or her financial position. This feature makes LAP overdraft an excellent financing option for those facing frequent cash flow mismatches. Self-employed individuals can also use LAP to meet short-term working capital needs such as for purchasing raw materials, paying salaries/wages, managing business payment cycles, etc.