Six myths to bust before applying for loan against property

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A loan against property (LAP) is often considered to be a much safer borrowing option, considering its secured nature. With interest rates usually ranging around 6.9%-13.85% p.a. and repayment tenures going as long as 20 years, LAP can bail out property owners by funding up to 50-70% of the pledged property’s value as a loan.

However, there are certain myths surrounding LAPs that we need to steer clear of. Here are some of them.

Myth 1: Lender takes control of the pledged property and it cannot be used by the borrower

One of the most common misconceptions surrounding loan against property is that the pledged property cannot be used by the borrower. The truth is, simply pledging your property for a loan against it does not put any constraints on its usage. As owner of the pledged property, you retain full possession of the collateral as long as you don’t default on the repayment.

Being a secured loan, lenders have the right to recover their outstanding dues by auctioning your property, in case you default.

Myth 2: LTV ratio can go up to 100%

LTV ratio is the proportion of property’s value that a lender can finance via loan. While availing a loan against property, prospective borrowers usually believe that it can be sanctioned for as high as 100% of the market value of the property. However, that’s not the case. Although the maximum loan amount would depend on the valuation of the mortgaged property, lenders usually provide loans up to 50-70% of the property’s market value. Factors such as location and age of the property, infrastructure, geographical stability, etc. are also considered during the evaluation process. Loan disbursal time may usually range anywhere between two to three weeks.

Myth 3: Only residential property can be pledged for availing loan

Another common myth associated with LAP is that only residential property can be pledged as collateral. This is untrue.

Apart from residential property, lenders may also allow commercial property, industrial property, and plot, to be used collateral.

Myth 4: LAP comes with restriction on end usage of funds

Another common myth related to LAP is around the restrictions on the end usage of funds. In reality, just like other borrowing options such as personal loans, top-up home loans and gold loans, a loan against property does not impose any restrictions on the end usage of loan proceeds, except for illegal or speculative purposes.

Borrowers can use the loan proceeds towards various purposes including, business expansion, child’s higher education, working capital needs, etc.

Myth 5: LAP offers short repayment tenures

Contrary to this, a loan against property can involve longer tenure, in fact, it may go as high as 20 years. Whereas other loan options such as personal loans, gold loans or top-up home loans usually involve relatively shorter tenures of up to 5 years, 3 years and 15 years respectively.

Myth 6: Loan amount is based on the purchase price of the property

Contrary to the myth that the lender calculates the loan amount based on the price at which it was purchased, it’s actually determined by the current market value of the property. During the evaluation of the property’s market value, lenders factor in the location of the property, age of the property, infrastructure, geographical stability, etc. The loan amount is finalised post evaluation of the property, after factoring in the borrower’s repayment capacity, credit score, the fixed obligation to income ratio, etc.