Busted Myths about Loan Against Property

While most of us plan ahead according to our personal and financial goals, we can’t be too prepared for a financial emergency. There could be instances like a medical emergency, business capital requirement or children’s education where we need funding at a short notice. There are many avenues to secure financing- personal loans, gold loans and education loans among others. Interest rates on unsecured loans like personal loans are higher than interest rates on loans against property, which are secured loans. So, depending on whether you are willing to pledge a security to get financing or not, you can choose a secured or unsecured loan. In case, it is secured loans that you are going for, the kind of collateral you have or willing to pledge would determine the type of loan most suitable to you.

Loan against Property or LAP, as it is commonly called, is a versatile loan suitable for both salaried and non-salaried customers. It allows you to take out a loan against land, house or a commercial property. The properties could either be self–occupied or rented out. The interest rates, long repayment tenures, easy documentation, no end-use restriction are some of the key benefits of a LAP loan.

What is a Loan Against Property (LAP) Loan?

A loan against property or LAP is a secured loan type that allows you to pledge your property in exchange for a loan. The property remains as collateral with the lender until the entire loan is repaid. The LAP interest rates are considerably lower than unsecured loans. If you have an immovable asset like a house, securing financing against it is a good idea.

The loan amount sanctioned in a LAP loan primarily depends upon the value of the property pledged. Typically, lenders grant financing up to 70-80% of the property’s value. The valuation of the property depends upon some of these factors-

Location: It is the most important factor affecting property valuation in a LAP loan. The property value is directly proportional to the number of resources, facilities, and amenities in its vicinity.
Age of the property: Newer properties are more valuable than older ones.
Infrastructure: Easy accessibility to railway stations, bus terminals, airports, malls, etc.
Commercial Establishments: Presence of shopping centers, markets, business parks, etc.
Sale and Lease Capacity: Ease of selling or renting out your premises.
Land Availability: Properties in high-demand areas due to lack of land availability will generate more value.
Property prices, interest rates, and income: Properties with prices that have the potential to rise further come with more value. Low LAP interest rates spur more people to buy homes. In addition to the above, an increase in income raises the affordability of a property.

Features and Benefits of a Loan against Property

Feature	Benefit
Loan to Value Ratio	A LAP loan offers a good loan value. Lenders can finance up to 90% of the property’s value if the loan amount is less than Rs. 30 lakh. If the loan amount is more than Rs. 30 lakh, the maximum LTV allowed is 75%.
LAP interest rates	The interest rates are usually lower than other secured loans and significantly lower than unsecured loans
End Use	There’s no end use restriction in LAP. It is a multipurpose loan to service a variety of financial requirements
Tenure	It has long repayment tenure of up to 15 years.
EMIs	Longer repayment tenure means smaller monthly installments
Documentation	The documents required are simple and the process is hassle-free.
Co-applicant	Adding Co-Applicants helps in maximizing the loan amount. Please note that co-applicants need not be the co-owners of the property.
Co-borrower	Having a woman Co-Owner helps in getting better interest rate on a loan against property.
Loan Transfer	The existing LAP loan can easily be transferred to another lender offering a better interest rate

Disadvantages of a LAP

The advantages of a loan against a house or land outweigh the disadvantages. However, you should be aware of the drawbacks.

Longer Tenure: Longer tenures bring the EMIs down. However, it also increases the interest component.
Long Approval and Disbursal Process: While the documentation regarding the KYC and income proofs is fairly simple, the property valuation could be a long-drawn process.
Complex Valuation Process: The process to establish clear ownership and legalities, if any, involved in the property is long and complex.
Variation in Property Value Calculation: There could be a disparity in the property assessment procedures by different lenders. And that could affect the property valuation and hence your loan amount eligibility.
No Tax Benefits: A loan against property does not offer any tax benefit. However, if you are a salaried employee who took a LAP loan to finance your new home, you can claim a tax deduction. Also, if you use LAP funds for business purposes, you can claim tax benefits on processing costs, interest charges, and documentation expenses.
Cannot sell mortgaged property: Whether it is a loan against land, house, or commercial property, you will not be able to sell it until the loan is paid off completely. However, if a potential buyer of your property is willing to repay your balance loan amount, the property sale is possible. In such cases, certain procedures such as the transfer of property title have to be followed.

Busting Some Myths about LAP

There’s no doubt that a Loan Against Property is an economical alternative to many loans to secure financing. However, there are many misconceptions surrounding it that need to be addressed. This shall help you in making a well-informed decision.

You cannot use the pledged property: One of the most common myths about LAP is that you cannot live in, lease out or use the property that you have pledged as collateral to avail of the loan. As long as you pay the EMIs on time and do not default on your repayment, there should be no problem. However, in case you have defaulted on the EMIs or repayment terms, the lender has the right to sell your property to recover the outstanding loan amount.
End Usage Restriction: A LAP loan is one of the most versatile loans and can be utilized for a variety of purposes except, of course, speculative and/or illegal purposes.
You get the full property value: Most lenders offer a loan amount of up to 70% to 80% of the property’s value, which in turn, depends upon many factors such as lender policies, infrastructure, property’s age, geographical stability, etc.
Only a residential property can be pledged: A LAP could be a loan against a house, land, or commercial property.
The loan amount is calculated on the property’s original purchase price: The property is evaluated by the lender’s in-house evaluator or third-party evaluator. The current value of the property is considered, among other criteria, to sanction the loan amount.
You need a high income to get a LAP: Having a good income does help in getting a LAP loan but it is not the only criterion. As long as you can prove your ability to service the loan, you can apply for it.
The lender takes possession of your collateral: It is true that while availing of a LAP, original property documents have to be submitted to the lender. However, the full possession of the collateral stays with you unless there’s a default on the repayment and in that case, the lender can sell the property to recover the loan.
It is not a safe option: If you are confident about your credit history and repayment ability, a loan against property is one of the most economical loans.
High Interest rates: A LAP interest rate depends upon factors like the lender you choose, the condition and value of the property, and your eligibility criteria among others. The interest rates are much lower compared to unsecured loans.

A LAP is an intelligent and economical financial tool to secure funding. Educating yourself about the aspects of a LAP loan shall help to reap the maximum benefit and not get dissuaded by myths and misinformation.