A loan secured against property is one of the most common loan products available in the market. It can be availed of to meet many requirements including company expenses, medical emergencies, a child’s education, wedding, and other personal needs. A loan against property can also be used to raise a large sum of money. If you are intending to take a loan against your property, keep the following things in mind:
Interest Rate
Different financial institutions offer different rates of interest on the loan against properties. The unique selling point of loan against property (LAP) is that it comes with a lower rate of interest when compared to other loan products. Financial institutions generally charge from 10 percent to 14 percent as the interest rate. Therefore, if you require funds for a longer period, LAP is the best option for you. However, keep in mind, never opt for an amount that exceeds your requirements because the longer the repayment tenure of your LAP, the higher the interest amount will be.
Loan Amount
Like other loan forms, financial institutions have predefined eligibility criteria for loans against properties. Also, the amount offered by different financial institutions varies from each other. Usually, most of the lenders provide LAP loans ranging between 40 percent and 75 percent of the current market value of the property. Choose the financial institution that offers the most out of your mortgaged property.
Opt for the loan against properties if the property you are mortgaging has a high market value and the upper cap on other financing options is insufficient to meet your obligations. For small funds, a loan secured against property is not a good option because it makes no sense to hold your property as a lien for a small sum. One must also keep in mind that if you are opting for a higher loan amount, default in EMI payments could result in the auction of the mortgaged property.
Loan Tenure
Most financial institutions offer the loan against properties for a maximum tenure of 15 years. One may also find a lender offering repayment tenure of up to 20 years. The loan repayment tenure varies from one lending institution to another. Due to the longer payback period, this loan is preferred by borrowers over personal loans or any other loan forms. Having a lower EMI due to the longer repayment tenure boosts your EMI affordability. Let us understand this with an example, suppose you have availed of a loan against property for Rs 20 lakhs at the ‘x’ rate of interest for 5 years, and the EMI you are required to pay is somewhere around Rs 65,000 a month. Now, if you extend the loan term to 15 years, the EMI will be less than half of what you were paying previously. However, keep in mind, increasing the EMI tenure will ultimately increase the interest component.
Cost of Loan
Just like any other loan form, the loan against properties also has some cost attached to it. These charges include loan processing fees, part prepayment charges, loan rescheduling charges, and foreclosure fees. But, the charges associated with a LAP are minimal; it is still advisable to compare these charges with different financial institutions. Choose the financial institution that has lower charges.
Property Ownership
You cannot apply for a loan against properties if the property you are willing to mortgage does not belong to you. Make sure the property to be mortgaged is free from any legal disputes. If the property has more than one owner, the borrower needs to obtain a NOC from other lenders. One may also add other owners as co-applicants to get LAP approval.
If in any circumstances, the lender discovers that the documents related to the property do not state the clear ownership of the property, the lender may face challenges. Also, if the property to be mortgaged has two or more owners, then even one of them disagreeing on financing can lead to the rejection of the loan application.
Property Insurance
Make sure the property you are mortgaging is insured. In the event of non-insurance of the property, the financial institution will turn down your loan application form.
Property’s Worth
As the name suggests, this type of loan is secured against a real estate asset such as a commercial or residential property. Lenders determine the loan amount eligibility based on the current market value of the property. The LAP loan amount does not have any relation with the previous or potential value of the property.
Similarly, applicants can borrow only up to 70-80% of their property’s worth. Investigate the loan to value ratio offered by different financial institutions before applying for the loan against properties.
To Conclude
Many borrowers are increasingly seeking loans against property these days. This is due to three factors: lower interest rates, a longer repayment period, and the ability to use the funds in a variety of ways. However, keep the above considerations in mind before applying for a loan against properties. These criteria may assist you in obtaining better loan terms.