How To Make The Most Of Loan Against Property?

Posted by Rudra Raghavan on December 10th, 2019

Any property is an asset. You could either use it as your home or for rental purposes. It is also a medium to avail of large sum of money in the form of loan against property (LAP). You can avail of a loan amount to a certain percentage of the market value of the property. There are, however, no restrictions on the end-user. You must consider the following aspects –

1) Long tenure: Considering it is a property loan, the amount is typically higher. They could go as high as INR 50 crore. Most of the lenders offer lengthy tenures which go up to 15 years. The moment you avail of LAP for personal use or for setting up a business, a longer repayment tenure assists you in reducing the monthly EMI burden. You could also accumulate a corpus for making partial prepayment or foreclose the credit. Shorter tenures result in higher EMIs, which not only increases the load on the borrower but also increases the chances of defaulting. 

Many lenders do not charge for prepayment or foreclosure from individual borrowers like salaried professionals. However, the charges apply to Hindu Undivided Families, companies, etc. Before deciding to do prepayment, check the costs that the lenders are providing on the same. It should not significantly impact your savings. 

2) Over-leverage: Just like any other secured loans, LAP loan allows you to leverage on the asset that you own. Considering LAP involves higher amount and lower interest rates, borrowers tend to over-leverage. Over-borrowing leads to higher loan value, more than you can afford. This increases the chances of defaulting and subsequently the risk of losing the property. Remember, the lender can recover the lost amount by auctioning the asset if you fail to repay the loan amount. Irrespective of the value of the property, borrow only what you need. 

3) Comparison: Since LAP includes higher loan amount and long-term association, the comparison factor becomes more crucial. While researching, do not only focus on lower interest rates. Lenders who provide the lowest interest rates might not be the most viable option. Finalise the lender only after considering other facets such as processing fees, prepayment or foreclosure charges, default payment penalty, etc. For instance, processing fee charges differ from lender to lender. Hence, make sure to compare all options on significant parameters. 

4) Property value: Every property has a cost attached to it depending on its age, location, reputation of the builder, size and amenities offered, etc. You must be aware of the total property value for making sure it gives you the desired amount you pledge for. Typically, properties with high value and in good locality fasten the approval process, considering lenders believes it to be low at risk. 

5) Eligibility criteria: This, of course, differs from lenders to lender. It is critical to understand them thoroughly as it reduces the chances of loan rejection and makes sure you receive the desired amount. The moment you match the conditions, it not only increases the approval chances but also the speed at which the credit gets processed.

Hence, keep these in mind before applying for a property mortgage loan.