There might be instances in life when one needs a substantial amount of funds for a plethora of reasons. Some of these reasons include – child’s higher education, wedding in the family, starting a business or for a medical emergency. One of the most convenient ways in which one can arrange for a large amount, at an attractive interest rate, is by availing a loan against property.
Hence it shouldn’t come as a surprise that the Indian loan against property (LAP) market is expected to grow at a CAGR of 14% from 2021 to 2026. Here are the things that you should keep in mind when applying for a loan against property.
Things to Keep in Mind while Applying for a LAP:
- How much loan can be availed using LAP?
A borrower has to pledge property as collateral to avail LAP from a lender. The property may be a shop, house, office, or any other property held by a borrower. The value of the loan is generally dependent on the value of the property. Usually, a borrower can get upto 60% of the market value of a commercial premise and upto 70% of the market value of a residential property. This is known as the LTV ratio for a loan against property. However, the exact LTV ratio varies across lenders.
- What are the loan tenures available?
One can claim a loan against property for a tenure of anywhere between 7 to 9 years. This is longer than other types of loans which offer funds for personal use and offers sufficient repayment time for a borrower. Thanks to the collateral pledged by the borrower, a lender can offer attractive interest rates to the borrower which reduces the EMI burden. In favorable circumstances, one may even enjoy a longer loan tenure depending on the age and credit score.
- What are the interest rates charged on LAP?
Interest rate is an important component of your loan. The lower the interest rate, the lower would be the EMI amount that you would have to pay every month. As written earlier, Loan against property turns out to be an extremely attractive option for borrowers who wish to seek a large amount while enjoying low interest rates. Hence, it is recommended that a borrower compares different interest rates changed by multiple lenders before choosing a suitable one.
- Who can apply for a Loan against property?
Any person above 18 years of age who owns a property is eligible for applying for a loan against property. However, different financial institutions evaluate multiple factors such as the income of the applicant, the value of the property, the past repayment history as well as other ongoing loans of the person before approving the loan. The borrower may also verify the employment status of the applicant. For instance, an applicant nearing retirement age may find it difficult to apply for a loan against property as compared to an applicant who has at least a decade of service to offer.
- What documents are needed for a Loan against property?
Most documents that are required for a loan against property would remain the same irrespective of whether the applicant is self-employed or salaried for most of the financial institutions. For instance, all borrowers have to submit proof of identity, proof of residence/ address, proof of age, bank statements, documentation pertaining to the property offered as collateral, photographs, application form, the income tax return as well as other property documents. The market value of the property would be determined by valuers who are associated with the lender.
A salaried person will be required to give details of their salary slip, bank statements, as well as Form 16 wherein the complete breakup of the salary, is available whereas a business owner would be liable to provide their income tax returns as well as other documents such as P&L statement and the balance sheet of their business. The above-mentioned documents are the important and basic documents needed for applying for a property loan.
- What precautions should a borrower take?
Loan against property applicants needs to ascertain the credibility of the lender. The lending institution should be credible. It is better to choose a lender who has a spotless record and doesn’t have any history of harassing borrowers. Borrowers must also be aware of other aspects such as the processing fee, loan against property interest rate, and any other hidden charges.
It is likely that property constitutes a substantial portion of an applicant’s net worth. Hence a LAP applicant must spend as much time as possible to evaluate multiple factors such as interest rates, tenure, LTV, and other factors which would determine the estimated EMI. Most lenders also offer LAP EMI calculators which make it convenient for the applicant to calculate the estimated EMI. The applicant must figure out whether he/she can repay the EMIs comfortably before applying for a LAP.