What is a Loan Against Property?

A Loan against Property is a mortgage loan provided by banks and financial institutions for personal as well as business purposes.

When Should I Consider Taking a Loan against Property?

A Loan against Property can be availed for a variety of purposes ranging from home renovation to purchase of machinery as well as to meet the shortfall of working capital. It is a safe proposition for the banks because they have collateral of the property as support for the finance they provide.

Salaried people opt for mortgage loans to cater to expenses like the educational needs of their children, medical expenses, home renovation, and so on. Business enterprises prefer the Loan against Property as collateral towards Business Loans and for procuring working capital requirements.

A Loan against Property is easy to procure because it is secured in nature. Banks usually maintain a margin while sanctioning a Loan against Property. This margin usually ranges from 50-90% of the value of the property (also known as LTV or Loan-to-Value). This facility is also popular because the borrower can utilize the property in spite of mortgaging it in favour of the bank.

The difference between a Loan against Property and a Personal Loan is that can take a Personal Loan without providing collateral. However, a Loan against Property requires you to mortgage your property to the lender.

Another significant difference is the rate of interest on a Loan against Property is less than the rate of interest on a Personal Loan. It is primarily because of the security available to the bank. Banks have the option of selling the security and recovering their dues in case of default on the part of the borrower.

There are various types of Loan against Property. While it can be confusing for a first-time borrower, MyMoneyMantra can help you through the entire process. Explore the possibilities with MyMoneyMantra and seal the deal!

What are the Different Types of Loan against Property?

1. Business Expansion Loans - Business entities can avail this facility for acquiring new machinery, purchase of plant, meeting working capital requirements, and invest in new technology or business. The lending banks require collateral in the form of property, residential, commercial, or industrial. Depending on the nature of the property available as collateral, the lending banks calculate the loan eligibility. For commercial properties, the LTV is around 55- 65%. In the case of industrial properties, the LTV reduces to 40-55% whereas the LTV in the case of residential property is in the range of 65-70%.

2. Working Capital Overdraft Facility - Banks sanction overdraft facilities against the property for meeting the day-to-day working capital requirements. Under such circumstances, the property is accepted as collateral. Lending banks estimate the amount of finance required based on the following figures:

  • Property value and nature of the property
  • Actual working capital requirement calculated as per the internal policies of the bank, usually the Projected Annual Turnover method.

3. Personal Expenses - Individuals can also avail Loan against the Property for personal expenses such as medical expenses, educational expenses, marriages, travel, as well as for purchasing consumer durables.

4. Home Renovation - Usually, people do not avail this loan for renovating homes as there are separate schemes available at comparatively lower rates of interest. However, there can be circumstances when the borrower might have to resort to avail a Loan against Property for home renovation.

5. Lease Rental Discounting - Some banks offer loans against the future rent receivables, especially in metropolitan and urban areas. One should note that the property that fetches the rent should also be mortgaged in favour of the bank. Banks usually finance in the range of 75% to 90% of the future lease/rent receivables. The tenure of such loans is shorter and should end before the expiry of the lease or the rental

How Do I Calculate the Eligibility for a Loan against Property?

1. Current income - In the case of salaried employees, the furnishing of the salary slips for the last three months and a bank account statement for the previous six months is necessary. In the case of self-employed professionals or business entities, financial statements like Balance sheets and Profit &Loss statements are required. One should supplement these financial statements with the bank statements to enable the banks to co-relate them.

2. Continuity of Employment - A letter from their employer that the proposed borrower is employed with them should suffice. You should supplement this information with Form 16, and IT returns for the past two years. Self-employed and business concerns can submit proof of doing business like GST registration certificates, partnership deeds, and Certificate of Incorporation (for companies).

3. Current Obligations - The take-home pay norms come into effect. Usually, one should have a take-home pay of 50% after accounting for all the EMIs including the proposed one for the Loan against Property. Hence, it is imperative for the borrowers to declare their current obligations.

4. Credit History - The lending banks are members of CIBIL (Credit Information Bureau (India) Limited). They can pull out the records from CIBIL to determine your credit score. Usually, a credit score in the range of 600 and above is acceptable.

5. Value of the Property - Your eligibility depends on the value of the property. The LTV ratio is in the region of 40-70% depending on the location of your property.

6. Legal Scrutiny Report - Banks have panel advocates to carry out the search of the property in the respective Sub-Registrar office to determine the chain of ownership. This process also enables them to determine if there are any encumbrances on the property. This search is critical as it allows the banks to understand whether you have the eligibility to create the equitable mortgage in favour of the bank.

7. Age of the Borrower - The minimum age of the borrower should be 21 years at the time of application.

Features of a Loan against Property (LAP)

1. Easy to get - LAP is a secured loan. Banks maintain a margin in the range of 50-90% of the value of the property.

2. Longer tenure - Usually banks sanction a LAP between 3 Lakhs to 100 Crores. It is the only loan facility other than the Housing Loan that allows banks to stipulate repayment periods exceeding 10 years. Banks are willing to sanction loans against property with tenures extending up to 15 years.

3. Lower interest rate - In comparison to Personal Loans, LAPs have a lower rate of interest. The reason is the security offered to the banks.

4. Lower EMI - When you have longer tenure and a lower interest rate than Personal Loans, the EMIs are bound to be lower.

5. Flexibility - Various banks have flexible loan products in this category. They are the term loans and overdraft facilities. You do not have this flexibility with Personal Loans.

6. Tax Benefits - You get benefits on the Income Tax front if you avail a LAP for home renovation purposes. Usually, customers go for home renovation loans if they have to carry out repairs to the same property to be mortgaged to the bank. You might carry out repairs to your home but avail a LAP by mortgaging another property. Under such circumstances, you have to prove that the end use of the loan is for carrying out renovations to the property you reside in.

Documents Required for Loan against Property

1. KYC Documents

The borrower should furnish KYC documents regarding identity proof and address proof. These documents include:

Identity Proof

1. PAN Card

2. Aadhaar Card

3. Voter ID

4. Passport

5. Driving Licence

Address proof

1. Registered Rent agreement

2. Aadhaar Card

3. Driving Licence

4. Lease agreement

5. Passport

6. Latest gas/Electricity bill

2. Income Proof - Financial Documents

1. Salary slips for the last 6 months for salaried employees (In addition, IT returns for the previous 3 years along with Form 16)

2. IT returns for the past 3 years for self-employed persons (Some banks accept 2 years IT returns as well)

3. Statement of A/c for the past 1 year where your salary is credited (in the case of salaried people)s

4. Profit and Loss statement and Balance sheet for the last 2 years in the case of self-employed persons

5. Sales tax, GST registration certificates, if applicable

6. Partnership deed in case of partnership firms (if the applicant is one of the partners or the firm itself)

7. Certificate of Incorporation for limited companies(if the applicant is one of the directors or the company itself)

Other Documents:

1. Loan application form

Property Documents:

1. Copies of all property documents that can establish the chain of ownership for the past 30 years

2. Encumbrance certificate for 30 years

3. Property tax paid receipt