Loan Against Property

What is Loan Against Property?

Loan Against Property, also known as mortgage loan, allows consumers to raise funds by leveraging their residential, commercial or industrial properties. Banks and HFCs offer loans against property for tenures of usually up to 20 years with some lenders offering longer tenures. The loan amount can go up to 85% of the property’s market value, depending on the lender and the credit profile of the borrowers. Many lenders also offer Lease Rental Discounting (LRD) facility, which allows consumers to avail loan by pledging the rental receipts of their tenants.

Features and Benefits of Loan Against Property

A Loan Against Property (LAP) is an ideal financing option for those looking to raise large loan amounts by leveraging the value of their property. With no end use restrictions (except for speculative activities), longer repayment tenures and relatively lower interest rates as compared to unsecured loans, LAPs offer several advantages. Following are the features and benefits of loan against property:

• Lower interest rates: The secured nature of the loan reduces the lending risk of banks and NBFCs considerably, thereby, allowing them to offer the loan at lower interest rates.
• No end use restrictions: Loan proceeds can be used for any purpose such as for consolidating multiple high-interest debts, covering costs related to wedding and business expansion, except for any speculative activities.
• Longer loan tenure: Banks and NBFCs offer tenures of usually up to 20 years on loan against property, resulting in more affordable EMIs.
• Higher loan amount: Lenders usually finance up to 70% of the property value, resulting in higher loan amounts.
• Higher chances of loan approval: The loan is backed by any underlying property, thus, reducing lending risk for banks/NBFCs and increasing borrowers’ odds of availing the loan.
• Overdraft facility: Borrowers can also avail overdraft facility on this loan, giving them higher liquidity at lower interest cost.

Loan Against Property Eligibility Criteria

The eligibility criteria for availing LAP varies across lenders, below are some general conditions that must be fulfilled to apply for loan against property:

• Residential Status: Resident Indian and Non-resident Indian
• Age Limit: 18 years to 70 years
• Employment Type: Salaried, Self-employed Professional and Self-employed Non-Professional
• Minimum Salary: At least Rs. 12,000 per month
• Net Annual Income: At least Rs. 1.5 lakh p.a.
• Work Experience: At least 1 year in the current organization
• LTV Ratio: Up to 85% of property value
• Credit Score: Preferably 700 and above
• Property Type: Residential, Commercial and Industrial properties are eligible to be pledged as collateral. Lenders will also consider the age and condition of the property before accepting the property as collateral.

How to Calculate EMI of Loan Against Property?

You can calculate the EMI on your loan against property using this formula: EMI = [P x R x (1+R)^N]/[(1+R)^N-1],

Where:

• P is the principal loan amount
• R is the rate of interest
• N is the loan tenure in months

As manual calculations can be tedious and prone to errors, it’s often more efficient to use an online loan against property EMI calculator. These calculators require simple inputs for EMI calculation like the interest rate, loan amount and tenure. Once you input this data, the calculator will provide you with the EMI amount, total interest cost and an amortization schedule on the basis of which you can compare different loan offers based on your loan repayment capacity.

Factors That Influence Your Loan Against Property EMI

Three key factors affect your loan against property EMIs are:

• Principal Amount: If the principal amount increases, your EMI will also increase, assuming the interest rate and loan tenure stay the same.
• Interest Rate: A higher interest rate leads to a higher EMI.
• Loan Tenure: A longer tenure reduces the EMI, but it increases the overall interest paid over the loan tenure.

Processing Fee and Charges

Below are some of the general fees and charges that may be applicable to your mortgage loan.

Loan to Value (LTV) for Loan Against Property

Loan to Value (LTV) ratio refers to the maximum loan amount a lender can offer against the appraised value of the property being mortgaged. For loans against property, lenders usually offer an LTV of up to 70% of the property’s market value. The exact percentage depends on factors like the type of property, applicant’s credit profile and lender’s credit risk policies.

How is the LTV Calculated?

LTV is calculated by dividing the loan amount by the current market value of the property and multiplying it by 100.LTV Formula:

LTV (%) = (Loan Amount ÷ Property Value) × 100

For example, if the property is valued at Rs. 1 crore and the lender offers an LTV of 70%, you may be eligible for a loan amount of up to Rs 70 lakh. Keep in mind that a lower LTV may help you secure better interest rates and improve loan approval chances.

Things To Know Before Applying for Loan Against Property

Those planning to avail loan against their property must consider these key factors before applying:

1. Interest Rates: The interest rates offered on loan against property vary across lenders. Therefore, applicants should compare the interest rates offered by multiple lenders and apply for the loan offer that offers them the lowest possible rate.
2. Repayment Tenure: LAP offers long tenures (up to 15–20 years). A longer tenure reduces EMI but increases total interest. You can prepay whenever possible to save interest. Choose tenure wisely for manageable EMIs.
3. Eligible Loan Amount: You can get up to 85% of your property value. Final approval depends on the applicant’s repayment capacity, property features and location and lender’s credit risk policies.
4. Turnaround Time: Applicants should know the time taken by the bank or NBFC for the approval and disbursal of a loan against property. It takes about 2-3 weeks due to legal checks, valuation and property verification, which is not ideal for those requiring funds urgently.
5. Prepayment Charges: No charges for floating rate LAP (as per RBI’s guidelines), but fixed rate LAP may have prepayment penalties. Thus, those planning to prepay their loan should check and compare the prepayment/ foreclosure charges and conditions on making prepayments/ foreclosures, if any, by various banks/NBFCs.
6. Overdraft Facility: Some lenders offer overdraft facility on LAP, wherein you pay interest only on the amount you withdraw and not on the full sanctioned amount. This reduces the overall interest cost paid by the borrower.

Home Loan vs Loan against Property