Taking a loan against property can be more economical than other means of financing. But not many people go for this option fearing the loss of the property. If one thinks that keeping his house as collateral in the bank for a business loan deprive him of the roof over his head, then consider this.
In banking terminology, it’s also called mortgage loan. It involves keeping residential or commercial properties such as houses, flats, or shops as collateral with a bank or NBFC.
Loan against Property is preferred because there are no restrictions on how the loan amount is utilised.
It can be used for business, home construction or renovation, weddings, treatment of illnesses, debt repayment, and other personal needs.
Former Deputy General Manager of Punjab National Bank, Suresh Bansal, explains that taking a loan against property can be a good option to start a business. This is because its interest rates are lower than personal loans.
Private banks provide funds as these consider your property as security, but nationalised banks approve loans only after calculating factors such as business proposals, sales and profits, and repayment capacity. Government banks do not provide loans against plots and agricultural land. As secured loans, loan against property offers lower interest rates. Because the risk of capital loss is lower. Typically, larger banks provide this type of loan at around 10-11% interest rate. It will depend on the type of your property, credit score, income, employment, and repayment tenure…
Interest rates:
According to BankBazaar.com, for borrowing 15 lakh rupees by mortgaging a property for 7 years, Kotak Mahindra Bank offers a rate of 9.50%, Punjab National Bank offers 10.4%, State Bank of India offers 10.6%, while, ICICI Bank and Bank of Baroda offer 10.85%, and Axis Bank offers a rate of 11%. The loan amount is determined based on the market value of the property. Typically, banks or NBFCs provide loans up to 60-70% of the property’s value.
Most banks claim that loans can be sanctioned worth up to 7.5 crore rupees. The tenure of the loan can be a maximum of 15 to 20 years. The combination of a long tenure and a substantial loan amount makes it attractive compared to personal loans.
Benefits of LAP:
How beneficial is it to take loan against property for business purposes? What should one keep in mind while taking such type of loan?
Many people believe that they will have to give up their property after taking a loan against it. That’s not true. The bank only keeps the documents as collateral. You can continue using the property. This loan can be used not only for business purposes but also for creating new assets and earning rental income. Let’s see how you can do this?
Let’s say X takes a loan against property worth 1 crore rupees for his 4 shops. With this money, he buys 2 more shops. The rental income from these 2 shops can be used to pay the EMI. After repaying the loan, X will get back the documents of his 4 shops, and he will also own 2 additional shops.
Similarly, Y, who is living in a house, can take a loan to renovate it or buy another one. This can become a source of rental income for him. Y can rent out the new portion of the house or the new house itself and earn rental income.
But before taking a loan against property, make sure to check out these factors:
You should only borrow when you can repay.
All property documents should be in order.
If you fail to repay the loan, your property will be auctioned to recover the amount.
You should compare offers from multiple banks to get a good deal on the loan.
If the loan against property is utilized for business purposes, tax benefits can be availed through deductions.
You will not get tax exemptions if you use the money for personal needs .
