Things to Know Before Taking Loan Against Property in India

Posted by Ankit Shrivastava on January 6th, 2020

Your property is among your most valuable assets and it could bail you out of tough financial situations by enabling you to apply for a loan against property.

Loan against property is one of the most accepted ways to tide over financial storms.

If you are taking a loan against property in India, you’d find almost every bank and NBFC offering its service. The process for application is similar across financial institutions, and all applications go through a strict approval process.

Because it’s a secured loan, a loan against property is available at very affordable interest rates.

Things to Remember Before Taking a Loan Against Property

Proper value of the property – The value of a property depends on its age, location, and market forces. It is best that you have your property appraised by a professional valuer before you seek a loan.

Tenure – A loan against property in India invariably means a long tenure (more than 1 year). It is commonplace to get a loan that can be paid off in five years or more. Due to being longer tenure loans, the amount of interest you would payout would be substantial even if the difference is 50 basis points.

Therefore, you have to look around to find the most affordable loan with the most flexible repayment terms. Different banks and financial institutions provide widely varying rates of interest.

Type of property – Any loan can be availed against both commercial property and residential property. The residential property can be both self-occupied and unoccupied. Banks generally do not prefer to loan out against a property that has a tenant or a long-term lessee.

Ownership – Jointly owned property is not ideal for taking a loan. The bank will also take an interest in your financial matters and check if any civil lawsuits are pending against you.

Loan to property value ratio – In a buoyant property market, you could expect 65% of the property value as the loan amount. But in a depressed market, no more than 50% is to be expected. This is because a downward trend of property prices means that what the bank keeps as collateral may be worth far less in a year or two.

Upper ceiling – Unlike a gold loan, there is no upper ceiling for a loan against property in India. You could borrow several crores if you have collateral to back it up. Of course, the bank would take a lot of interest in how you propose to repay your debt. No matter how lucrative the LPV ratio, a financial institution does not want assets that have to be claimed, foreclosed, and auctioned off.

Income to debt ratio – The bank would rarely allow you a loan where the repayment installment exceeds 50% of your income. In some cases, it is possible, especially if you are able to convince the bank that the amount would be used for business expansion and show them a solid business plan with an increase in revenue.

Other Important Points to Know

While the precise terms and limits of loan against property differ across banks, here are some general points worth knowing.

You can get a loan amount between Rs 5 lakh and Rs 35 lakh against your property

The loan tenure could range anything between 6 months and 36 months, while it’s also possible to get the loan amount for a longer tenure of repayment.

Most banks allow you the option of complete repayment of the loan before the term ends; make sure you understand whether there’s a pre-payment penalty.

The list of documents you need to submit along with your application varies across banks, so make sure you prepare your application file properly and completely.

Conclusion

With an interest rate ranging between 9-15%, a loan against property is a viable, suitable, and relatively easy way to avail of a loan.

However, most financial institutions offer a LAP only till the age of 60 for salaried individuals and up to the age of 75 for self-employed professionals such as doctors and lawyers.