Property is an asset that, in addition to giving you a roof over your head, also serves as a saviour. For instance, a property owner in dire need of money does not need to apply for a personal loan that comes with a higher interest rate. Instead, to get by during a financial emergency, s/he can use an HDFC loan against property or LAP. It is a unique instrument for utilizing the full financial potential of one’s immovable asset while still holding its title. For those who are unfamiliar with this concept, a loan against property is a secured loan that banks, housing finance companies and NBFCs provide against residential and commercial property.
Salient Features of Loan Against Property
- Whether you are salaried or self-employed in a professional or business setup, anyone having a pre-owned property can avail HDFC loan against property.
- The Quantum of loan sanctioned to the borrower is also on the higher end.
- The loan amount can be utilized for a number of things, including emergency medical expenses, children’s further education and marriage, as well as starting a business. The only criteria for availing of this type of loan are that it should be for a legitimate purpose.
- Existing customers of a housing finance company or a bank do not need to go through the document verification process again.
- LAP comes with low-cost EMIs with 15- to 20-year repayment tenures. It comes with a low-interest rate that reduces the repayment burden.
Why is it usually preferred over other types of loans?
Less expensive than a personal loan
One of the prime reasons behind considering HDFC loan against property is they are offered at a lower interest rate if compared with a personal loan or business loan. It is relatively easy for existing customers to receive a LAP; new customers will have to submit the necessary documents and credit history and marketability of the property to be mortgaged.
Suitable for both business owners and salaried employees
Self-employed people may avail of HDFC loan against property if they want to expand their current business. Salaried people can avail of LAP if they are facing an unexpected medical emergency that may call for expensive surgery or long-term treatment or if they need to send their children to a foreign university for higher education. However, before doing check the affordability by using the loan against property EMI Calculator.
Aspects of Loan Against Property
- Loan Repayment: Since the loan amount that can be availed against LAP is on the higher end, it’s critical that the borrower meets the necessary income requirements to repay the full loan amount. Though the term differs from one lender to another, the tenure is from 12 months to 20 years. You can check different aspects of a loan using a loan against property EMI Calculator.
- Property Valuation: An HDFC loan against property is given in exchange for collateral, residential or commercial building. Your lender will appraise your property before determining your loan’s eligibility and the amount to be sanctioned. The sanctioned amount will depend on the prevailing fair market value, not on the past or projected future value. Housing finance companies often provide between 50 and 60 percent of a property’s market value.
- Property Ownership: The lender won’t approve the loan until they are satisfied that the title to your property is clear and has a marketable title. Clear and that it can be sold. Additionally, the co-owners must qualify for the loan and be a part of it.
- Tenure: Compared to a personal loan, LAP comes with a longer repayment term. The EMIs are spaced out over many years and have a substantially lower interest rate. Lower EMIs are a result of a longer-term, which eases the burden of the monthly payment. To know exactly how much you will need to pay, use the loan against property EMI Calculator.
- Pre-closure option: If you choose to, you can pre-close the loan against the property. You won’t be charged any penalties for pre-closing the loan if the loan you acquired has a variable interest rate. You will have to pay a minimal sum if the interest on your loan is fixed.
- LTV (loan-to-value) ratio: It is essential to evaluate the loan-to-value (LTV) ratios given by various lending institutions in order to secure a fair bargain. Public banks can lend up to 65% of the property’s worth, whereas private sector banks can lend up to 75%. This variance is due to how financial institutions appraise property or to internal policies at those institutions, which limits the LTV that is being offered.
Additionally, the LTV offered is typically lower than in the case of a residential property if the borrower offers his or her business property as collateral. Banks believe that borrowers are more committed to protecting their residential properties than their commercial ones, which naturally reduces the perceived risk to the bank.
Things to Know Before Applying
- Your property is the asset that is used as security for a loan against property, so the loan amount granted would be based only on the value of your property. Therefore, it is crucial that you are aware of the worth of your property before applying for a loan against it, taking into account elements like its age, size, location, and amenities.
- Banks examine information such as payment history and borrower repayment capacity prior to authorizing a loan. Your chance of being approved for a loan decreases significantly if you have other debt or obligations. The number of dependents in a person’s household is also taken into account by some banks because more dependents are thought to affect repayment capacity.
- Prior to picking the best lender for your LAP, compare the lenders. It is because these loans have larger amounts and longer tenure. When evaluating different lenders, experts advise against focusing only on the interest rates being given. Other factors, including prepayment fees, foreclosure fees, processing fees, late payment penalties, and loan-to-value ratios, must also be taken into account.
- According to experts, one should avoid over-leveraging because it may lead to loan default and the loss of the asset pledged as collateral for the loan. There is a potential that your loan request will be denied if the property offered as security is in dispute.
- Unlike home loans, which offer a tax benefit of up to Rs 2,00,000 per year on interest payback and Rs 150,000 on principal repayment, LAP offers no tax benefits.
LAP provides flexibility to borrowers, no restriction on end use, higher loan amount, low-interest rates, and longer repayment tenure. It is suggested to use a loan against property EMI Calculator before availing of this type of loan. While these advantages seem good, do remember that if you default on repayments, your rights over the property are transferred to the lender.