Things to remember before taking loan against property.Home Buyer's Guide | Mar 13, 2023 | 10 min read
As a homeowner, you have the advantage of tapping into the value of your property to secure a loan for a variety of purposes through a Loan Against Property (LAP). Whether you’re looking to finance a business expansion, fund a child’s education, or consolidate high-interest debts, a LAP can be an attractive option with its relatively low-interest rates and long repayment tenure. However, before you decide to take a LAP, it’s crucial to carefully consider various factors to ensure that you make a well-informed decision.
What is a Loan Against Property?
A loan against property, often known as a LAP, is a specific kind of secured loan that allows borrowers to borrow a substantial amount of money by using their property as collateral for the loan. The percentage of the property’s market value that the lender will loan you is normally up to 80 percent of the total value of the asset serving as collateral for the loan. The borrower has the option of spreading the repayment of the loan amount out over a longer period of time with affordable EMIs that make the process of repayment stress-free.
Key considerations before applying for a Loan Against Property
To ensure that your decision to apply for a Loan Against Property aligns with your financial goals and requirements, it is crucial to keep the following factors in mind:
1. Property valuation
The first and foremost factor to keep in mind before taking a Loan Against Property is the valuation of the property. The lending institution evaluates the market value of the property as per the current market rates to determine the loan amount to be sanctioned. It is important to ensure that the property valuation is accurate and fair, as it directly impacts the loan amount that can be availed. Some lenders may offer higher or lower valuations than others, so it is essential to do thorough research and choose a lender that offers a fair and competitive valuation.
2. Interest rates
Another crucial factor to keep in mind is the interest rates charged by the lender. Although the interest rates for Loan Against Property are generally lower than those for Personal Loans, there can be significant differences in interest rates charged by different lenders. Therefore, it is advisable to do a market study of interest rates comparison being charged by different lending institutions and choose a lender that offers a competitive interest rate. In the long term, even a very little change in interest rates may lead to considerable cost savings.
3. Tenure of the loan
The loan tenure offered by lenders is one of the key features of Loan Against Property. It typically ranges from 5 – 15 years, depending on the lender. As a borrower, it is important to choose the loan tenure that best suits your financial situation. While longer loan tenures may result in lower EMIs, they also result in higher interest payments over the entire loan tenure. Therefore, it is important to strike an appropriate balance between the loan’s duration and the EMIs to guarantee that the loan’s payback is not too burdensome.
4. Processing fees
Lenders charge loan processing fees as per their terms and conditions, which may vary significantly from lender to lender. The processing fees may start from 0.5% of the sanctioned loan amount or have a minimum/maximum fix-cap amount. While the processing fees may seem like a small component of the overall loan, they can significantly impact the overall cost of borrowing. Therefore, it is important to strike an appropriate balance between the loan’s tenure and the EMIs to guarantee that the loan’s payback is not too burdensome.
5. Property ownership
Finally, it is crucial to ensure that the property being pledged as collateral is clear of any disputes or discrepancies in documentation. For a smooth journey, it is essential to ensure that property documents are consistent, complete, the title deed is clear, and all joint owners are in favour of obtaining a loan. Therefore, it is important to ensure robust property documentation and consensus of all joint owners before applying for a Loan Against Property. This can help avoid longer loan disbursement time and ensure that the loan application is approved smoothly.
A Loan Against Property can be a viable option for homeowners looking for financial assistance for various purposes. However, before applying for a LAP, it’s essential to consider factors such as property valuation, interest rates, loan tenure, processing fees, and property ownership to make an informed decision. By doing your due diligence and working with a trusted lender, you can leverage your property’s value to get the funds you need while minimising the risks.
If you’re a home buyer looking for interest-free assistance for your property-related payments, HomeCapital can provide you with the support you need. Whether you need help with down payment, payments on possession, stamp duty payments, or other property payments to developers, HomeCapital has got you covered.