January 29, 2019

Loan Against Property (LAP)

What is Loan against Property?

A Loan against property or LAP is a loan given by the lender to the borrower against the property mortgaged.

Unlike the unsecured loan, the loan against property involves a security that is the property, which the borrower can mortgage in case the loan is not repaid by the borrower. Hence, it is a type of mortgage loan.

In such loans, the market value of the property is calculated and the loan furnished is a certain percentage of the market value of the loan.

For what purposes can LAP be taken?

Loan against property (LAP) has the low interest rates which can be used for business or personal finance purposes:

  1. These loans can be used for expansion of the business and meeting the credits of the business and bonafide needs.
  2. The loans are easy to avail so they can help in case of an urgent medical financing.
  3. The loans are also useful to facilitate the renovation or repair/extension purposes in the house or flat.
  4. The loan can be used if there is a marriage in the house.
  5. The parent can use this loan for sending the child abroad for higher studies.
  6. One can use the loan to fund a vacation to an attractive tourist destination.

What kind of properties can be mortgaged for LAP?

A property owned or rented by a person can be used against Loan against property. One can use these loans against a house, under-construction house or a piece of loan. All the co-owners of the property will have to apply for the loan.

The process of Loan against Property

The applicant will tell the property details to the bank. The bank’s research team will then do a market analysis and evaluate the property price. Then, the loan amount will be decided. The borrower’s loan property will be attached to his loan account. At the later stage, if the loan is not repaid to the lender, then the bank holds the jurisdiction to mortgage or resale the property.

Loan against Property v/s Home Loan

There are many differences between both the types of loans:

  1. A home loan can only be used for the purpose of buying a house, or constructing it or improving it. On the other hand, a loan against property can be used for any purpose; business or personal.
  2. Home loans offer the cheapest rate of interest. Loan against property are the second cheapest loans in India.
  3. Home loan is against a property that is not yet owned by you. However, loan against property can be taken against a property that is already owned by an individual.
  4. The loan tenure is usually more in case of the home loan than the loan against property.

Personal Loan or a Loan against Property

There are many differences between both the types of loans:

  1. No security or guarantor is required for a personal loan. For the loan against property, the person needs to provide his property as collateral.
  2. Loan against property has a lower rate of interest as compared to the personal loan. The rate of interest for loan against property is 10% to 16%. However, for personal loan it is 11% to 21%.
  3. The equated monthly installments are higher for personal loans and cheaper for loan against property.
  4. Loan against property is a secured loan because a security is given. Personal loan is an unsecured loan.
  5. The loan tenure is 5 years in maximum for personal loan, however for Loan against property it is 15 years.
  6. The amount of loan sanctioned depends on the market value of the property in case of a Loan against property. For personal loan, it depends on the income of the borrower.

Tax Benefits of Loan Against Property

One can avail tax benefits for loan against property under two sections:

Principal repayment under Section 80C: The tax deduction under this scheme is for the repayment of the principal loan amount for the loan against property. The maximum tax deduction under the scheme is INR 150,000. The deduction can be claimed only if the construction of the property is complete, not during the construction.

Home loan interest repayment under Section 24: The tax deduction under this scheme is for the repayment of the interest amount for the loan against property. The maximum tax deduction under the scheme is INR 200,000.

General Features & Benefits of Loan against Property

There are many benefits of a loan against property:

  1. A person can use his asset that is the property in the time of need for business and personal use.
  2. The loan against property is processed relatively faster. This is so because the security is already available.
  3. In case of the foreclosure of the loan, no penalties or charges are imposed. This way, the loan can be reduced in a shorter way and the burden on the borrower will be reduced.
  4. It is a brilliant way to expand the business by using the same property to finance the business capital needs and then, expanding the business. It is a smooth and efficient way if multiplying one’s source of incomes.
  5. The best part is that the borrower continues to be the owner of the property and does not have to repay the whole loan to get back the ownership.
  6. In case, the loan paying capability is not there, the borrower can mortgage the land and repay the loan. The borrower might be left with an extra amount to invest more in the business.
  7. The loan is a good choice when drawing huge amount.
  8. The loan leads to a lesser EMI option and enhanced loan tenure.
  9. The rate of interest is comparatively low.
  10. It is a good debt consolidation tool.

Eligibility Criteria for Loan against Property

  1. The person must be a citizen of India or a person of Indian origin.
  2. The foremost eligibility criterion is that the borrower must own the property or given it for rent.
  3. The person must be working and drawing regular income. He can be salaried, working professional, or a self-employed businessman or entrepreneur.
  4. The total income, savings, and the financial constraints like already existing debts will also be considered.
  5. A good CIBIL score will help you getting the loan.

Documents Required for Loan against Property

  1. For Salaried Individuals
  • Application form with photograph of all the applicants with cross signatures.
  • Identity proof like Copy of Passport / Driving License/ Voter ID card / ID card issued by employer with signatures.
  • Address Proof which should not be more than three months old like Copy of Ration Card / Passport / Electricity or Phone Bill / Rent Agreement / Credit card statements / Property Papers.
  • Latest salary slips.
  • Form 16 or salary certificate showing the total salary and tax deducted from last two years.
  • Bank statement of the last 6 months validating regular income.
  • A cheque on account of processing fees in favour of the bank.
  • The documents for property mutually agreed by the bank and the borrower as security.
  1. For Self-Employed Professionals
  • Application form with photograph of all the applicants with cross signatures.
  • Identity proof like Copy of Passport / Driving License/ Voter ID card / ID card issued by employer with signatures.
  • Address Proof which should not be more than three months old like Copy of Ration Card / Passport / Electricity or Phone Bill / Rent Agreement / Credit card statements / Property Papers.
  • Proof of office address location.
  • Proof of educational qualification.
  • Proof of the existence of self-service or occupation.
  • Income tax returns copy (ITR copy) of the latest three years for individual and business.
  • Profit or Loss computation of the latest three years validated by an authorized CA.
  • Bank statement of the last 6 months validating regular income for individual and business.
  • A cheque on account of processing fees in favour of the bank.
  • The documents for property mutually agreed by the bank and the borrower as security.
  1. For Self-Employed non-Professionals
  • Application form with photograph of all the applicants with cross signatures.
  • Identity proof like Copy of Passport / Driving License/ Voter ID card / ID card issued by employer with signatures.
  • Address Proof which should not be more than three months old like Copy of Ration Card / Passport / Electricity or Phone Bill / Rent Agreement / Credit card statements / Property Papers.
  • Proof of office address location.
  • Proof of business profile (position in the company).
  • Income tax returns copy (ITR copy) of the latest three years for individual and business.
  • Profit or Loss computation of the latest three years validated by an authorised CA.
  • Bank statement of the last 6 months validating regular income for individual and business.
  • A cheque on account of processing fees in favour of the bank.
  • The documents for property mutually agreed by the bank and the borrower as security.

Top Providers for Loan against Property

The following banks are the top providers of the loans against property:

  1. State Bank of India
  2. TATA Capital
  3. Kotak Mahindra
  4. Union Bank
  5. Yes Bank
  6. Indian Bank
  7. Bank of Baroda
  8. Kotak Business Loan
  9. Central Bank
  10. Oriental Bank of Commerce
  11. HDFC Ltd
  12. Axis Bank
  13. ICICI Ltd
  14. Citibank
  15. PNB Housing Finance
  16. Federal Bank
  17. Bajaj Finserv
  18. Ing Vysya