It is said that one of the safest investments one can make in their life is property. Since land is a scarce resource, its value usually rises with time. If you already own a piece of property, whether it is a structure (such as an apartment) or an empty plot of land, you can very easily leverage that property for some money in times of need.
This is possible with the help of a Loan Against Property.
What is Loan Against Property (LAP)?
As the name suggests, a Loan Against Property is the amount of money a financial institution can let you borrow against the value of your real estate. The institution will value your real estate, and the total amount it would allow you to borrow, keeping your real estate as collateral, would be contingent on many factors. LAPs also constitute a loan against land only, so they aren’t limited to built structures.
LAP is commonly known as a secured loan.
What Properties Qualify For An LAP?
Properties are divided into two main categories: Residential and Commercial. The state of occupancy does not have a bearing on the eligibility criteria of the property as far as LAPs are concerned. Some properties eligible to take a loan against are:
- Self-owned but rented commercial property
- Self-owned commercial property
- Self-owned residential property
- Self-owned and self-occupied residential property
- Self-owned but rented residential property
- Self-owned piece of land
- Self-owned industrial property like warehouses and factories
- Schools, hospitals, cinema halls, etc. are also eligible for LAPs
Financial institutions generally maintain a register of approved builders who can be granted special privileges for obtaining a loan against an unfinished property or property under construction. However, when applying for that Loan Against Property, the constriction should be 90% completed. An architect hired by a financial institution determines the completion rate.
The land used for taking a LAP should not be agricultural land since the agricultural property is not mortgagable.
Some people who possess a bare piece of land take out a loan for building a property on it. Essentially, they mortgage the upcoming property to finance it. This type of loan is often confused as a loan against property but isn’t. A loan against property is granted for either a vertical physical structure or a bare piece of land. However, you cannot turn an empty piece of land into one with a standing structure using an LAP issued to you for that very land.
Residents of cooperative societies can avail of a loan against property given they furnish a No Objection Certificate from the society with their application.
Can I Borrow A Loan Tantamount To The Property’s Full Value?
Generally, institutions do not let the borrower take an amount that is 100% of the property’s value that they are building. The usual amount that lenders let the borrowers take is between 65%-75% of the full value of their property for residential property and 50%-60% for commercial property. This is called the loan to buy, or LTV. The typical tenure of an LAP is estimated to be around 10-15 years. Loan Against Property interest rates can vary between 12%-16%, which is usually higher than home loans but lower than personal loans.
Personal Loans Vs. LAP
Lower interest rates and a longer tenure make for lower EMIs, which, when compared to personal loans, make LAPs an attractive choice for someone who’s confused between the two. Personal loans entail a higher interest rate, and the tenure seldom stretches above 5 years. On the other hand, a personal loan is an unsecured loan, so there’s no collateral to be kept.
Is there an eligibility criterion for a loan against property?
Yes. The eligibility criteria for an LAP are a bit more stringent than that of other unsecured loans. The applicant’s income and loan officers are interested in every aspect of the applicant’s financial behavior and history. Checks regarding their savings, previous mortgages, repayment history, credit score, among others, are some of the crucial aspects that are inquired into.
Lenders prefer customers who’ll be employed for the whole tenure to repay the loan, so employment status is important. This is why loans against properties have an age-at-maturity set at age 60. For non-salaried applicants, the age-at-maturity can be a bit higher.
Process of Securing a Loan Against Property:
Finally, here is the process you must follow if you want a Loan Against Property. As long as you follow the criteria mentioned above and go through every step of the following list diligently, you should have no problem securing a loan.
- Lenders assess the net market value of the property in question. This process is carried out by a certified valuer who is an expert in this task. Visits to the property are made, and local property owners, managers, and agents are consulted with.
- The applicant’s eligibility for the LAP is scrutinized.
- The age limit for a LAP is 18-60 years of age.
- Salaried applicants have to furnish income proof such as bank statements, identity proof, and Form 16. Self-employed applicants have to bring in their IT return for the past 2 years and a chain of property documents, along with identity proof.
- The sanctioned amount can vary between 2 lacs to 10 crores.