Pledging properties in exchange for money is an age-old practice that can be traced from ancient Roman and Greek civilizations to 17th Century landlords. With the advent of modern banking systems, the premise has remained the same. Loans against property are a type of loan where borrowers pledge their mortgage to secure funds. The property can be commercial, residential, or any other immovable asset. Usually, lending firms sanction amounts that range from 50% to 60% of the market value of your property. However, you may secure less or more funds depending on your income, assets, and creditworthiness.
Factors to consider before applying for loans against property
Here’s a beginner’s guide for loans against property with important factors that you must take note of before applying for a loan.
- Loan amount: While loans against properties may sanction a huge loan amount, be mindful and analyze your financial requirements and choose a loan amount that you can pay off comfortably. Another common mistake is to take a huge loan amount to avail of tax deductions, but if you cannot pay the monthly EMIs, tax exemption benefits won’t matter.
- Eligibility criteria: The upper limit of your loan tenure is until 58 to 60 years of age i.e. your retirement, depending on the lender you choose. You must have a steady income with at least three years of work experience if you are a salaried employee. If you are self-employed, you must provide income proof like payment invoices or business address proof. It is also essential to have an excellent credit history.
- Loan terms: Loans against properties, viewed as secured loans, often have a longer repayment tenure of up to 15 to 20 years. Since they are secured, you may also avail of comparatively lower interest rates on your loan against your property. Compare different lenders and choose the one that fits your needs the most.
- Loan processing time: Since lending firms have to conduct property checks, evaluate all your property’s previous ownerships and tax documents, and verify everything legally, loans against properties take a longer time to be sanctioned.
- Additional charges: Lending firms often charge additional costs like processing fees, transaction costs, and late fees. You must always clarify such costs with your lender before taking the loan. It is essential to read through the entire loan agreement to make sure you understand what you are signing up for.
- Risks: There is a mild risk associated with secured loans like loans against properties. If you fail to repay the monthly EMIs, lenders may seize your property for repossession. You must carefully assess your financial situation, avoid taking multiple loans or making too many big purchases during the loan tenure, and choose a loan amount that you can pay off easily.
Benefits of loans against property
- Lower interest rates: One of the biggest advantages of applying for a secured loan like a loan against your property is that they have the lowest interest rates. Lending firms view your property as a security against the approved loan amount, resulting in comparatively lower interest rates than credit cards and personal loans.
- Better loan terms: If you have decent credit scores and are applying for a loan against your property, you can negotiate better loan terms. Since the loan is secured against property, you have a higher chance of getting approved for longer repayment tenure, higher loan amounts, and flexible repayment options from your bank or NBFC.
- Tax deductions: You can claim tax benefits on the interest paid on your loan against your property depending on how you plan to utilize the amount. Under Section 37 (1) (4) of the Income Tax Act, you can claim tax exemption on the interest paid and associated charges if you utilize the amount for business purposes. Salaried individuals can receive deductions of up to INR 2 lakhs if they use the loan amount to purchase another residential property under section 24 (B) of the Income Tax Act. If you are using the funds to renovate your property, you cannot claim any deductions.
- High loan amount: Lenders take the market value of your property into account when approving your loan amount. Thereby 60% to 80% of the market value of property results in higher loan amounts. Since your property acts as a layer of security, if you have good credit scores, banks and NBFCs may even approve outrageous loan amounts against your property.
- Flexible repayment options: You can repay loans against property in one-time lump sum repayments or monthly settlements spread over a period. If you have chosen the EMI option but suddenly find yourself with some funds at your disposal, you can pay off a chunk of your loan.
Disadvantages of availing of loans against property
- Property value fluctuations: Loans against property, as their name suggests, are approved based on the market value of the property. If the property value decreases considerably over the repayment tenure, the borrower may have to provide additional collateral or assets to the lender.
- Risk of losing property: The biggest disadvantage of securing loans against your property is that in case of financial emergencies, if you fail to repay the monthly settlements, lenders have the legal right to seize your property. To avoid such scenarios, you can apply for joint loans with a co-applicant so that, in case you have trouble paying back some of the settlements, your co-applicant can take over.
Documents required to avail of loans against property
Here’s a list of the possible documents that you will require to take loans against your property. It may differ from lender to lender.
- Identity proof like an Aadhar card, Voter ID, PAN card
- Address proof like passport, driving license, and utility bills
- Your most recent three month’s bank account statements
- Income proof like salary slips or payment invoices
- IT returns for salaried applicants
- Property valuation documents
Loans against your property are an excellent way to secure funds. Make sure to compare different lenders, check their eligibility criteria, and negotiate better terms to choose the best loan that fits your financial profile. To make sure that you won’t burden yourself or hamper your quality of living to pay off the loan settlements, use a loan EMI calculator online. Platforms like ApnaPaisa offer these services for free. You can input your loan amount, interest rate, and tenure to find the EMI amount