We all know about a home loan which is a loan taken to buy a residential property. However, are you aware of Loan Against Property or LAP? It is a loan which is taken for different purposes using an immovable property as collateral. So, one may take a LAP against an owned residential or commercial property, rented or personally occupied. The due diligence process of a LAP is similar to that for a home loan and the eligibility factors ultimately impact the Loan Against Property Interest Rate.
The following documents are important to apply for a LAP:
- Identity and address proofs of the applicant(s), such as PAN, Aadhar, passport, driver’s license, voter’s ID card, etc.
- Documents of the property being used as collateral, such as sale deed, ownership deed, tax receipts, registration certificate, lease agreement (if any), insurance certificate, etc.
- Income proofs of the applicant(s) in the form of salary slips, IT returns, bank statements for at least six months to a period of up to three years.
Along with the above documents, one’s Loan Against Property eligibility is ascertained by the following criteria:
- The present market value of the mortgaged property directly impacts one’s LAP eligibility. It decides the sanctionable loan sum. Higher is the present value of the collateral, greater will be the applicant’s LAP eligibility. The market value of the property in question is impacted by its place, area, age, reputation, etc. As a general rule, lenders approve a loan disbursal amount of up to 60% of the current valuation of the mortgageable property.
- The personal income levels of the applicant(s) and how stable and regular are the income credits determine one’s LAP eligibility and interest rate. Also, one’s profession is of importance. An MNC or a government employee is believed to have better eligibility in comparison with any other applicant for these have an assurance of income credit, security, and appreciation. A self-employed person with at least a few years’ old successful business is also eligible.
- CIBIL score or individual credit rating of the applicant(s), which is a function of their individual debt repayment history, delays and defaults (if any), regularity in payment of credit card outstanding dues (in full), past or present loan/EMI repayments, and so on. A score of 700 or above is the minimum expected for LAP eligibility.
- The Loan Against Property EMI calculator also considers one’s age. This impacts the loan tenor and EMIs. Younger borrowers, with more number of active years ahead of them, are offered a longer tenor with a lower interest rate both of which ease their EMI burden.
Other factors related to the life stage of the applicant(s) which affect their eligibility are the number of dependents, family size, any other earning member in the family, and educational qualification.
- What is also of significance is one’s existing assets and investment portfolio. It is prudent to invest in more stable and less risky products like PPF, government bonds, debt funds, instead of riskier options like equity, to apply for an LAP. Within equity, large cap is favoured over mid cap over small cap. The better is the diversification in the investment portfolio of the applicant(s), the more assured is the lender of the income stability of the borrower(s).
A lender finally sanctions a loan amount basis the LTV or Loan to Value ratio, which is entirely an internal call. Herein lies the scope to negotiate a better sum and/or interest rate with the lender basis one’s robust credit and income history and the market value of the collateral.
In conclusion, the main benefits of an Loan Against Property are:
- As a secured loan, it allows for a much lower interest rate to be made available to the borrower(s), as compared to a personal loan or any other general use loan.
- The owner retains the right to continue to occupy their property being used as collateral.
- Debt consolidation can be done using an LAP to close high interest unsecured loans and save one’s EMI burden.
- An LAP allows for a much longer tenor than a personal loan which eases the EMI burden on the borrower(s).
- The borrower has the freedom to use the loan sum in multiple ways possible without any restriction.
- There are special category LAPs like LAPs for doctors to upgrade their clinics, CAs to expand their business, LAP for education, etc. Each has its own differential interest rate based on the borrower’s profile and the loan objective.
- The Loan Against Property tax benefits are also worth noting. If the LAP is used towards purchasing another residential property or repairing and/or upgrading one’s house, then tax benefits only on the interest up to a limit of Rs.2 lakh can be claimed.
So if there is a sudden need for funds, consider a cheaper LAP instead of a personal loan at a lower Loan Against property interest rate.