LOAN AGAINST PROPERTY
Many times in life we are faced with certain expenditures that are necessary to be made and have not planned for. Events such as wedding expenses or a medical emergency require significant sums of cash outflow. Either one has to sell his assets to meet the expenses or has to borrow.
Loan against Property is a multi-purpose secured loan. It would be a type of a personal loan but the proceeds from which can be used for any purpose. Certain lenders for amounts in excess of ~INR 25 Lacs make it mandatory for the borrower to specify where he/she intends to allocate the money. Lenders want to ensure that the money lent is not being used for speculative purposes or for transacting risky assets such as equity.
These loans in general are for the longer tenure relatively. On an average this loan varies in tenure of 60 months to 120 months. Certain loans have a payback period of 15 years as well. The tenure of the loan is dependent on the sum of the loan borrowed.
The interest rate that is charged on such loans is usually the Floating Rate of interest. Since this is a long term loan, the lender and borrower are exposed to interest rate risk. For instance had the loan been sanctioned at a time where the money supply is very high, the interest rate charged on the loan would be lower than at times of recession or low money supply. The floating rate of interest is to protect the lender and borrower over the tenure of the loan. The floating rate is revised, usually every 3-6 months based on the changing Marginal Cost of Lending Rate (MCLR). This rate is reviewed usually at every 3 months, and any change in the MCLR results in a change in the floating interest rate.
The loan is against the property (acting as a security) which could be either commercial or residential. Each will be valued according to respective parameters and a loan of up to 60% (70% in certain cases) of the value of the property will be extended to the borrower. It is an important requirement for the property to be insured. Since it is acting as a security with the bank, the property must be insured against unforeseen damages caused by fire or natural events. If not insured, the borrower would not be extended the loan.
Loan against property is a brilliant way to unlock the potential value of your property without having to lose the ownership of the property. This scheme is designed for big amount loans, therefore selling a property should not be an attractive option for the needy as compared to taking a loan against his/her property. This way he meets his needs as well as keeps his property.
Eligibility and Features of Loan against Property
- This loan is usually for big sum of money
- Long term loan usually for a period of over 120 months
- Loan is repaid usually at a floating rate of interest (based on lender’s MCLR)
- The margin money paid is in the range 20-40 % for all types of properties
- The property must be insured against unforseen damages
- The property should be in the name of the borrower or co-applicant
The following are the conditions/ criteria for extending such a loan.
- Firstly, unlike other secured and unsecured loans this type of loan is extended to slightly older individuals. The minimum age to avail this loan is around 24 years with certain lenders. The reason is for this is simple. the lender would prefer the borrower to be of an age where he will be permanently employed thereby reducing the probability of missing EMIs. Loan against property is usually for a big sum (in excess of INR 25,00,000) and the lender must ensure the employment stability of the applicant. The maximum age limit for availing such a loan is generally 58-60 years of age.
- Salaried employees or professionals must provide a proof of employment stability and last 6 months bank statements must also be submitted to the lender. Moreover, it is beneficial for the borrower if he can prove employment stability. It would help him get a better rate of interest as compared to someone with a fluctuating employment record. Salaried employees should have a recurring income in the range INR 300000 to INR 500000 per annum. The same for self employed is ~INR 750000
- The commercial property and residential property are obviously valued differently. Both have different economic variables at play determining their respective values. On an average, lenders ask the borrower to make a margin contribution of 20-30% of the loan request amount, for commercial properties. The margin money collected on residential property is usually nearing 40%. Margin Money must be paid by the borrower at the start of the loan after which the lender extends the balance amount as loan (Loan requested minus the Margin paid by borrower).
- The pre- payment for such a loan is possible after the first 6 months. It is important to check with each lender differently, since these could vary from lender to lender. Usually, the industry trend has been to charge 4 % charge on pre-payments made over 25% of the outstanding loan amount per annum. These numbers are an average, and this may vary from lender to lender. One should also bear in mind that the pre-payment charges only apply under the fixed rate model. For all floating rate loans, there are usually no pre-payment charges that the borrower needs to bear.
- The maximum amount extended on such a loan could be as high as INR 10 Cr and even as low as INR 2 Lacs. The tenure will usually be greater than 84 months.
Interest & other Charges on Loan Against Property
Since this is a secured loan the interest charge will be lower than other unsecured loans. The loan amount is also very big and the tenure for repayment is generally in the excess of 100 months. For such a long tenure and big loan amount the interest charged will be in the range of 9.2-10.5% p.a. These rates are the rates prevalent in 2016 and are subject to change in line with the RBI policy interventions.
Most borrowers ignore the Service Fee that is charged as a one-time payment for the services provided by the lender. This is not a deal breaker, but these charges pinch each borrower. The processing fee on such loans is usually in the range of 1-2% of the loan value. The lender will also specify the maximum limit to such fee. For example, HSBC charges a processing fee of 1 % on the loan value as well as mentions that this fee will have a maximum ceiling of INR 10,000.
Apart from the processing fee, there are numerous other charges and fees that the borrower must know about. All lenders provide the customers with a service fee schedule.
Documents required for Loan against Property
- Proof Identity
- Proof of Address
- Last 6 months bank statements
- Proof of employment stability
- Age Proof
- Last 3 months salary slip
- Last 2-3 years IT returns (Form16) – Self employed or business owner
- Last 2-3 years balance sheet and P&L Account (Audited) – Self employed or business owner