Loan against property: 9 golden rules before you proceed

Emergency funds is one of the unannounced requirements that might befall one in pandemic. Loan against property is one of the common avenues to arrange a big amount within a short time span. Loans against property is a secured loan and it can be of use for medical or other emergencies. Most banks offer these loans with a low interest rate compared to personal loans that are unsecured. Usually, the amount of loan that banks approve depends on the borrower’s income so that the EMI the borrower has to pay does not exceed 60% of his/her monthly income.

But before taking a mortgage loan you must keep these nine important points in mind. Else you might have to pay a heavy price.

1. Compare

An individual should compare the rates offered by different lenders before choosing one. These loans typically involve higher amount and higher tenures. Do not limit your research to just the interest rates offered. Other parameters such as foreclosure charges, processing fee, prepayment charges, late payment penalty and loan to value ratio should also be considered.

2. Limit

Avoid over-leveraging your loan as it can result in default and you can end up losing your property against which you have taken the loan. First chalk out the amount you want, check it again and then go for the loan.

3. Parameters

The loan amount can vary from Rs 5 lakh to Rs 500 crore, and the tenure can go up to 20 years or even 25 years for some special cases. The loan to value (LTV) ratio is normally restricted to 50-60% of the property’s market value. You should check the property’s price also before applying for a loan.

4. Tax

Loans against property do not provide any tax benefit, unlike home loans that provide a tax benefit of up to Rs 2 lakh per year on interest repayment and Rs 1.5 lakh on principal repayment. So, your tax liabilities remain the same even after taking the loan. So, you should plan your financials accordingly.

5. Ownership

The lender will approve the loan only after it is convinced that the property has a clear and marketable title deed. Further, the co-owners need to be part of the loan and should meet the criteria. If you are the lone owner, then the loan would be approved smoothly. In any other situation, it is completely the bank’s discretion.

6. Background

Banks check background records such as payment-track records of the loanee, repayment ability of the borrower, credit score and others before approving a loan against property. Hence, if one has other loans or existing liabilities, his/her eligibility for another loan decreases. So, check your background before applying for a fresh LAP.

7. Dispute-free

Your loan request can be turned down if the property being pledged as collateral is disputed. Banks do not approve a loan request if the property concerned as collateral for a loan is under dispute, or the property papers are not clear about ownership. So before placing the loan application check all the property-related papers carefully.

8. Benefits

Loan against property is available for longer tenures of up to 20 years and with speedy approval as property can get you flexible repayment options. Documentation for a loan against property is relatively easy. Banks generally approve a loan within 7-10 working days and the process is a bit easy as the loanee’s property is with the bank.

9. Repayment

The lender will evaluate your repaying capacity with the help of your income statements, repayment history, ongoing loans, etc. Additionally, a few banks also take into consideration the number of dependents of the borrower, as more dependents might imply lower repayment capacity.