Loan Against Property 101

Loans against property (LAP) are also commonly known as mortgage loans. It’s a type of loan where a property is mortgaged to acquire a loan. If one needs money to meet one’s short term requirements, one can opt for a LAP because it’s cheaper than personal loan.
To begin with, personal loan interest rates are in the range of 10-25 per cent. This is generally on a daily or a monthly reducing balance method. The rate at which a LAP is issued falls in the range of 9.50% -15.75%. The prime reason why the LAP is cheaper than the personal loan is because it’s a secured loan, where the property is the security.

LAP can be used to start or expand an existing business, plan a dream wedding, sponsor a child’s education. However, one needs to give a declaration stating that these funds will not be used to carry out any illegal activities or speculation. The loan is given as a certain percentage of the property’s market value (usually around 40 per cent- 65 per cent). But the threshold amount is generally defined by most lending institutions. Usually, banks and other lenders extend a loan against property as a security, for up to 50 per cent of the market-value of the property. However, the extent of the loan is also subject to your eligibility as per income norms (which are stricter than say home loan norms) bearing that in mind there are a few banks who could lend more than the decided threshold amount if a person is a high value customer.

The LAP is usually available on floating interest rates. This type of loan is typically available against residential property, although one may acquire this against commercial property also.
The eligibility criteria to avail this loan are similar to that of a home loan. LAP can either be taken as an overdraft. The advantage of taking a loan using the overdraft option is that you have to pay interest only on the money you withdraw, till the time you repay it. If you opt for a normal loan you will have to pay the interest on the entire amount throughout the tenure of the loan. You must know that not all banks offer the overdraft facility; hence weight your pros and cons before approaching the lender.
Most banks don’t require guarantors. If at all they consider a guarantor the deciding factor is his/her net worth.

There are processing fees and prepayment charges levied by lenders, but the percentage charged in LAP is comparatively lesser than that in home loans. Processing fees is the amount charged by banks to cover the cost of processing your loan application. It is usually between 0.25%-2%. Processing fees differ from one bank to the other.

The pre-payment fee is the penalty paid by the borrower for foreclosing the loan before the actual tenure. Pre-payment fees are levied as a percentage of the outstanding principal of the loan amount, it’s not levied by all banks, hence one needs to check the banks that do not before applying for LAP. The charges are anything between 1-4 percent of the outstanding loan amount. There are also charges for converting your interest rates from fixed to floating and floating to fixed that again are options offered by some banks.

Here are a few things you need to keep in mind before approaching lenders for a loan against property:

  • Minimum income criteria
  • Age eligibility
  • Tenure for which loan is granted
  • Interest rates offered by various banks in the market, whether fixed or floating
  • Whether overdraft is available
  • Guarantor needed
  • Fees and charges (prepayment facility)
  • Documentation

Once you are clear about these few things, acquiring the loan becomes much easier.