Loan Against Property (LAP), or Mortgage loan, is a collateral loan against a residential or commercial property. Among all other forms of loans such as personal loan, business loan, or gold loan, a loan against property offers the best solution for your immediate financial needs. Your property is pledged with a bank or NBFC in return for large funds that you need to repay with interest in the given time.
Unlike other loans, a mortgage loan can be taken for any purpose like wedding, education, medical, business expansion, start-up, renovation, consolidation of debt, etc. If you are not so financially literate regarding loan terminologies, you may fall prey to several myths. There are many misconceptions and myths related to loan against property among people. Due to such myths, people may end up making the wrong financial decision.
Here are some common myths outlined below that you need to watch out for when considering mortgage loan –
Myths 1- It is better to go for a higher interest Personal loan than LAP
A personal loan at a higher interest rate is an unsecured and expensive loan. If you own a property and maintain a good credit score, you should avoid taking a loan with a higher rate of interest. An individual who can make timely repayments without missing any EMIs must not fear taking a collateral loan at a lower rate of interest. You can take advantage of low mortgage loan rates that can save you lakhs of money. LAP is a great financial tool that also improves your credibility.
Myth 2- With a Mortgage Loan, you can borrow equal to the property value
It is a myth among individuals that you can borrow a loan amount equal to the property’s value. A borrower can never borrow equal to the property’s current value in the case of a secured loan. There is always a margin that ranges from 60% to 70%. Depending upon the borrower’s income and credibility, LTV (Loan-to-value) differs. The valuation of the property is calculated by the bank officials. They calculate the accurate value of the property and ensure that it is free of litigation. You can use a free mortgage loan calculator online to get a quick overview of the loan amount disbursed.
Myth 3- With Mortgage Loan, you cannot use the property
Misconception knows no boundaries. People generally believe that when you mortgage your property, you cannot reside in that place anymore. That’s not true. If you fail to pay your EMIs, only then you may lose your property. If you are paying EMIs regularly, you can comfortably reside in your property. A borrower only pledges the property to a bank or financial institution. It does not make the bank the owner of your property. In case of any default in repayments, the bank may ask you to forego the property or go for consolidation of debt.
Myth 4- Mortgage Loan is available only against a residential property
It is absolutely false that you cannot get a loan against your commercial property. LAP is available on both residential and commercial properties. There are no restrictions on the usage of the property as well as funds. You can use the loan amount for any purpose like your children’s wedding, your child’s education, business expansion, medical treatments, etc. Banks and NBFCs offer flexible options for borrowers to avail of maximum funds at low mortgage loan rates. You can also get funds in the form of a flexible loan where you can withdraw, repay, and re-withdraw funds at your preferred time.
Myth 5- Only high-income bracket individuals are eligible for LAP
Income is a very important factor to be eligible for a loan. Even if your income is not so high, you can still be eligible for LAP. The Loan-to-value is based on your income, repayment ability, and credit score. If you are not under debt and earn a sufficient regular income, you are eligible for a loan against property. A mortgage calculator is a tool that helps you get a rough estimate on your monthly EMI amount based on the loan value and rate of interest.
Myth 6- The sanction value is based on the acquisition price of the property
It is a myth among people that the loan amount is based on the acquisition price of the property. The loan amount always depends upon the market value of the property pledged. Some other factors also affect the amount of loan such as the current condition and age of the property. If your property is poorly maintained, the disbursed amount would be lower irrespective of the purchase price.
Myth 7- Mortgage loan is not safe and you should never take a collateral loan
Pledging your home as collateral for a loan carries no risk. If you are eligible for LAP in terms of credit score, income, and repayment ability, taking a collateral loan has no harm. A collateral loan offers a lot of benefits over a conventional. Firstly, mortgage loan rates are the lowest when compared to other loans. Secondly, you can take a top-up loan with an increase in home equity; and thirdly, it becomes easier to pay fixed installments for a longer time.
The above explanations against the 7 myths can change the perception of people regarding a mortgage loan. A lot of misinformation and misconceptions exist in the market related to LAP. Even having an eligible property, many individuals go for the higher rate of interest loans and end up paying more money.
A Loan against Property is one of the most intelligent financing solutions for borrowers having collateral. Due to unawareness regarding sources of financing, individuals overlook this aspect and repent later. Before taking any decision, borrowers should educate themselves by understanding the differences between secured and unsecured loans.