All you need to know about loan against property

[ecis2016.org] We answer some commonly-asked questions about loan against property and focus on its key benefits and pitfalls

Property is an asset that not only provides you with a roof over your head throughout its life but also acts as a saviour in times of need. For example, a property owner who desperately needs cash, need not apply for expensive personal loans. Instead, s/he can use a loan against property (LAP) to tide over the monetary emergency. A loan against property is a unique instrument, to utilise the full monetary potential of one’s immovable asset while still holding its title.

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Loan against property meaning

What is loan against property (LAP)?

A home loan that you take against a property that you own, is defined as a ‘LAP’ in India’s housing finance world. Owing to the comparatively longer tenure and lower interest rates, it has emerged as a popular form of long-term loan, especially among the self-employed in India.

Can I take loan against my house property?

A LAP could be taken against residential, industrial and commercial properties. In case of residential property, it could be a rented out property or a self-occupied property, including apartments, flats, individual homes, etc. Commercial property includes office buildings, shops, malls, complexes, etc. You could also get a LAP if you own a land parcel or a plot.

“LAPs are given on freehold property and the owner must have a clear title to it,” says Rajan Ahuja, director, Realty & Verticals, a Gurgaon-based real estate consultancy.

LAP amount

How much loan can I get against property?

Banks only offer a certain percentage of your property’s market value as LAP. Depending on the bank from where you are taking the mortgage, the LAP amount could vary between 90% and 70% of the property’s market value. Most lenders keep a 70:30 loan-to-value ratio, in case of LAP and LAP-OD. To reduce risk, most banks offer loans of up to 50%-65% of the value of the property, while some non-banking financial companies (NBFCs) go up to 75%.

If the technical assessment by the bank shows the market value of the house is Rs 1 crore and the loan-to-value ratio has been kept at 70:30 by the bank, it would be willing to lend you Rs 70 lakhs as loan. Do note that the bank would send its own technical valuators, to physically examine the property and arrive at its market value.

As is true of home loans, your personal financial standing is another factor when the bank decides the loan amount. So, apart from the property’s market value, your credit history, repayment capacity, stability of business and income, experience, age, number of assets and liabilities, etc., would be considered while deciding on the LAP-OD loan amount.

LAP eligibility

Who can get a loan against property?

There are certain age and income specifications that borrowers have to meet, to mortgage their property. Financial institutions mostly offer LAP to the below mentioned category of borrowers:

Salaried applicants

Age: 33 to 58 years

Employer: Private company, public company, multi-national company.

Residency status: India

Self-employed applicants

Age: 25 to 70 years

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Income: Regularity of income.

Residency status: India

Note: Loans are approved only when the self-employed can show an earning track record of three years, usually via income tax returns.

LAP processing fee: Most banks, including public lender SBI, charge 1% of the loan amount as processing fee, which could go as high as 3% too. Apart from the processing fee, the borrower also has to pay several small expenses, including documentation charges, commitment fee, valuation fee, stamp duty charges and GST.

How to apply for loan against property

When can I apply for LAP?

LAP is provided for a wide range of customer needs. However, all banks have specific instructions that the capital thus borrowed should not be used in speculative activities in the market.

“People often take a LAP, because it is cheaper and deploy it in avenues that are risky,” points out Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

The bank would ask you the specific purpose for which you are taking the loan and would approve your request if you plan to use the capital for healthcare and medical issues, higher education, wedding, down payment of a high-value purchase, business expansion, marketing and promotion, etc.

How much time do banks take to process LAP requests?

As this is a secured loan, banks are quite forthcoming on approving LAP requests. Most banks process your LAP request within a week’s time.

LAP documents

What documents do I need to apply for LAP?

Self-employed and salaried individuals are asked to submit different sets of documents, along with their LAP application. While the number and type or documents may vary, depending on the bank from where you take the loan, financial institutions typically asked for papers mentioned below to process your LAP application:

Salaried applicants

• Six months’ salary slips.
• Bank account statements of the previous three months.
• PAN card.
• Aadhaar card.
• Address proof.
• Copy of the title documents of the property.
• Income tax returns.

Self-employed applicant

• Bank account statements of the previous six months.
• PAN Card.
• Aadhaar Card.
• Address proof.
• Copy of the title documents of the property.

LAP prepayment

Can I prepay a LAP?

On pre-payment of your loan against property, the banks will not charge any penalty, if the loan is linked with a floating rate of interest. However, if you have taken the mortgage on a fixed rate of interest, the bank may levy a penalty as stated in the LAP agreement.

What is the tenure for LAP?

The loan tenure could be as short as two years and can go up to 20 years, based on your requirement. Depending on your age, the bank may provide a longer tenure. LAP-OD is mostly given for a maximum period of 24 months. The limit might get renewed at different intervals.

LAP interest rates

Which bank is best for loan against property? 

Different banks offer different rates of interest on LAP. Mentioned below are the prevalent interest rates on LAP in some leading banks.

*Interest rates are subject to periodic change.

[ecis2016.org]  Home loan interest rates and EMI in top 15 banks

Home loan versus LAP

How is LAP different from home loan?

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While both loans involve property, a home loan is taken to buy a house while a LAP is taken against a property you already own. However, there are certain similarities between the two products, because property is an integral part of these two products.

Secure loan: Home loan, as well as LAP, are categorised as secured loans. The bank has the house as collateral and is entitled to sell the asset to recover losses, in case the debt goes bad.

Lower interest rates: As the two products are secure loans, the interest rates on both the products are lower, when compared to personal loans, which are categorised and unsecured debt.

Long tenure: The tenure of a LAP is longer and you can also get a larger amount, as compared to a personal loan, which cannot exceed Rs 10 lakhs.

Tax benefit: Borrowers can claim tax benefit on the interest component of a loan against property, as well as home loan. However, borrowers cannot claim any tax benefit on the principal repayment of loan against property.

Loan against property overdraft

Loan against property overdraft (LAP-OD) is a short-term loan that is provided to the borrowers against a property. Under this facility, after approving your LAP request, the bank will open an overdraft account for you, in which you will be assigned the approved LAP-OD amount. You can withdraw the amount from this overdraft account, as and when you need. You will be liable to make the interest payment (EMIs) from the time this LAP-OD is availed of.

If you expect some cash flows soon, take the loan as an overdraft facility and not as a term loan. Whatever surpluses you get, can be parked in the overdraft account. This will enable you to lower your interest cost.

Can I avail of LAP against uninsured property?

The borrower will have to buy mortgage insurance to get his application approved. The bank would insist on this, to cut its losses in case of a default by the borrower.

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LAP tax benefits

You can avail of tax benefits on loan against property. However, the benefits would be extended, depending upon the usage of the loan amount.

“Under Section 37(1) of Income Tax (IT) Act, the interest paid and associated costs, such as processing fee and documentation charges, can be claimed as business expenditure. The funds have to be clearly identifiable as having been deployed for the expansion of the business, to be able to avail of the tax deduction,” informs Dhawan.

If the loan is used for buying another house property, you can claim an annual rebate of Rs 2 lakhs under Section 24(b). Borrowers cannot claim any tax benefit on the principal repayment of a loan against property.

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Loan against property risk

The key risk in a LAP is that you could lose the property you have borrowed against, if you default on the loan payment. Also, unlike a home loan, there is no tax benefit to the salaried individual, on the principal amount. Moreover, if you default, your credit score will be affected, a penalty will be charged and in the worst-case scenario, you could lose the property.

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FAQs

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