Loan Against Property

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What is LOANS AGAINST PROPERTY?

Loan against Property ( LAP ) is  very unique product which couples the feature of a personal loan and  a secured loan. This loan product helps in unlocking the value of the most precious asset: your Property. The end use of the loan is not monitored when compared to any other secured loan which generally comes with a specific purpose. In that sense, LAP is an any purpose loan, but at the same time secured by collateral of property.

This is one of the best tools for those looking at debt consolidation. There are several businesses which has obtained high cost funds like unsecured business loans and leveraged themselves to a greater extend, thereby putting pressure on higher interest cost and lower profit margins. LAP perfectly fits for such businesses to reduce their borrowing cost and consolidate debt at lower cost. The other advantage is the tenor for LAP loan is generally in the range of 7 to 15 years, thereby giving the borrower to plan business expansion among other things. Moreover with the appreciation of property, future requirements also can be taken care of. This allows the best use of the property that is owned and at the same time will enable the raising of funds required for various purposes. Also, a loan against property comes with a low interest rate compared to that of a personal loan or home loan.

Characteristics of LAP:

  • The loan is secured in nature.
  • Only those who own a clear and marketable property can avail this loan.
  • Loan is long term in nature ,usually ranges between 7 to 15 years depending on the use of property.( Commercial or residential)
  • Interest rates are low when compared to unsecured loan.
  • Funds can be used for any personal or business purpose.
  • Best suited for people looking for debt consolidation and business expansion
  • Quantum of loan is high depending on the value of property
  • It increases the future borrowing capacity along with property appreciation.
  • The loan can also be used as a normal overdraft or a dropline overdraft (depending on the lender)

FAQs on Loan Against Property

Who can avail a Loan against Property?

LAP loan can be availed by Salaried Professionals, Self-employed individuals and also those who are getting stable source of income like rental income etc. There is a minimum amount of salary that has to be earned by those who are employed and also a minimum limit of annual income earned by the professionals and other self-employed people. This condition is there to ensure that the people who can afford to repay the loans against property can only make use of the facility.

What is the difference between a Home loan and LAP?

Home loan is basically to acquire a home. Here the ownership comes to the borrower only with the purpose of acquiring a home. Loan against property is given to those who owns a property which can be mortgaged. Tax benefits are being given to home loan borrowers, whereas in LAP, this benefit is not available.

LAP loans are priced higher when compared to a home loan.

Can I use LAP for any personal purpose?

Yes, LAP loan is any purpose loan which you can use for any of your personal needs or business needs. It typically acts like a Personal Loan, with the difference that security need to be provided.

Can I close other loans with LAP?

Yes, LAP is a perfect product to consolidate all your loans which are running at higher costs. Moreover interest rate charged on LAP is relatively low when compared to unsecured loans.

How much loan I can get on my property?

Loan amount depends on the valuation of your property and also the use of property. Typically if the property is used for commercial purpose, loan is restricted to 50% of the market value of the property and for residential property, this may go upto 60-70% also. However it is at the discretion of the bank to sanction the loan amount, depending on the repayment capacity of the borrower.

Can I get an overdraft / cash credit against my property?

Yes, you can get overdraft against your property. Most of the banks offer this product under LAP head. The advantage with this product variant is interest would get charged only on the utilized amount.

Can I get LAP against my property which has been leased out?

Yes, you can get a LAP loan on your leased out property. In fact if the lessee is a known corporate, then this is a perfect product to unlock value of your property. You can raise loan on the property and the monthly EMI shall be taken care of the rental income, thereby not putting pressure on your pockets. Such type of loan is also called Lease Rental Discounting (LRD). Most people use this product to add more property to their asset base.

Can I get tax rebates for LAP loan?

No, you cannot get tax relief under LAP Loan. However you can post the entire interest during the financial year to your profit & loss account as expenses.

Will the EMI amount or the tenure of the loan changes during the loan period?

Yes, the EMI amount or the tenure of the loan could get changed if one has availed a floating rate of interest.

Do I need to get property insurance while availing a LAP loan?

No, it is not mandatory to buy property insurance when you are availing a LAP loan. But it is in the interest of the borrower to insure property as it eliminates risk of loss of property.

Can I sell the property even when the loan is not paid off?

Yes, you can sell the property even when the loan is active. However you need to inform the lender and get a consent from them to sell. The title deeds shall be released to the borrower once all the dues to the bank are fully paid off.

I have a plot. Can I get a LAP loan against it?

No, most private banks in India do not give a loan on plot. However if there is a structure on the plot used either for residential or commercial use, then banks after doing the due diligence and upon satisfactory checks , they might sanction a loan. However nationalized banks consider plots to give loan against property.

Can I get a loan against my industrial shed?

Loan against property is usually given for residential and commercial property and that too for RCC structures. A few nationalized banks and private banks do consider industrial property as an additional security to enhance the limits to business. However it is purely at the discretion of the lender to sanction a loan against such properties.

Product Variants:

Banks have  designed various products out of Loan against property. Traditionally,  LAP typically meant  a loan that will be available with the property as a security for the loan.

However with changing times and competition heating up, banks have come out with innovative products. The list below is indicative only and a few banks offer LAP as a combination of one or more  variant.

  1. Term Loan ( TL )
  2. Overdraft / Cash Credit ( OD / CC)
  3. Lease Rent Discounting ( LRD )

Most nationalized banks structure loans in such a way there is a Term Loan component and other as a Cash Credit/ Overdraft component. The conditions for servicing the loan  are different and one need to be careful while choosing such combo products

Term Loan :

Term Loan is the traditional offering where the bank sanctions a particular amount to the borrower as the loan against the property. The amount of loan is determined by the value of the property and the margin as well as the requirement that is present for the funds. The amount is then sanctioned to the borrower that he/she can use as per his/her requirements. The interest will be calculated based on the figure of the loan disbursed and the repayment schedule for the loan against property is then worked out accordingly. The borrower will then repay the loan through monthly installments as per the working and this will then complete the entire loan process.

Overdraft/ Cash Credit :

Overdraft is another way in which the loan can be given and operated. Here, once the loan against property is approved for a specific amount the entire figure does not have to be taken by the borrower. Rather the borrower has the option to choose the manner in which he/she actually wants to operate the account and use the overdraft amount available to him/her. This means that the money can be withdrawn as per the need and this also results in a saving of interest cost because the amount of interest will be based upon the overdraft amount withdrawn and the time for which it is used. At the same time, the borrower can keep making deposits into the account as per the convenience and this will go on to reduce the outstanding overdraft amount. This again saves on the interest cost because the borrower pays interest only on the overdrawn amount for the applicable time. On an overall basis, the borrower can use the money till the limit that has been sanctioned and the amount of the interest will be calculated at the interest rate decided upon based on the actual situation. There is also the facility to renew the overdraft limit at specific time intervals whereas in the term loan offering the loan limit remains the same for the entire duration of the loan against property.

Lease Rental Discounting:

One of the most powerful loan product which unlocks the value of the property without denting one’ s pocket . Also a powerful tool for multiplying wealth. When compared to Term loan and Overdraft wherein the borrower’s eligibility is scrutinized based on the business income, LRD does not take into account the business income. Banks would look at the rentals , source of rental, rental period etc and sanction a loan. However bank would insist on escrowing the rent to their account to take care of the prepayment. The quantum of loan would depend upon the valuation of property, lease rentals, no. of years the lease has been executed etc. However banks look at such proposals only if the rent is coming from a known corporate/ entity.

Purpose of Loan Against Property:

The purpose of loan depends on the need which has arisen. The common reasons why a particular loan against property is required.

  • Higher education for Children
  • Holidays  for  family
  • Marriage in the family
  • Buying Jewellery
  • Medical Emergencies
  • Business Expansion
  • Working Capital requirement
  • Debt Consolidation
  • Investments ( not for speculative purpose)
  • Any other personal needs/contingencies

Documents Required for Loan Against Property:

The common list of documents for both Salaried and Self Employed applicants are as follows:

  1. Photograph
  2. Identity proof
  3. Address proof
  4. Income proof
  5. Bank Statements
  6. Continuity Proof
  7. Qualification proof (applicable only for Self Employed Professionals)

Income proof of salaried employees  are payslips and bank statements
For self employed applicants, the following documents are required

  • Income tax returns along with all supportings including audit reports for the past 3 years..
  • Last 12 months’ bank statements of main business banking.

In addition, there are some other common documents related to the property that are also required to be produced.

  • Original title deeds  of the property that is being offered  as collateral to loan.
  • Property tax receipt.
  • NOC from society to create mortgage of the property.