Lending institutions are witnessing a steady growth in the loan against property (LAP) space with an estimated Rs 2.25 lakh crore business already having being done. More people are opting for this secured loan under which they mortgage their properties to lenders (banks, housing finance companies or NBFCs) for loans. CRISIL expects the LAP business to grow at 22 per cent annually in the next four years, and double to Rs 5 lakh crore by March 2019.
As a borrower, when you take a loan against property there are a few things you must consider. Let us take you through the key things you should watch out for before you say yes to LAP.
Lower rates: While a LAP will not be as competitively priced as a housing loan, it will be cheaper than personal loans. The reason is not too difficult to fathom. In loan against property, the borrower mortgages his house, making the loan a secured one. A personal loan is unsecured. Personal loans from banks usually start from 13.75 per cent and can go as high as 25 per cent, while those from NBFCs are offered at flat interest rates. “LAP, on the other hand, is available at around 11-14 per cent,” says Adhil Shetty, CEO, BankBazaar.
If LAP rates are not cheaper than personal loan, it’s not worth to mortgage your house.
All-purpose loan: You can get a LAP for purchase of machinery, purchase of commercial property, closure of existing high-cost debts, buying a new property, child’s education and any other personal, business or professional need.
However, not all properties may be used to tap the LAP route. For example, the property against which LAP is sought from Citibank has to be based out of any of the following approved Citibank locations – Ahmedabad, Bangalore, Chennai, Delhi/NCR, Hyderabad, Jaipur, Kolkata, Mumbai, Pune, Coimbatore, Chandigarh and Surat.
Similarly, according to YES Bank website, loan against property service locations are in Delhi/NCR, Baroda, Chandigarh, Mumbai, Jalandhar, Pune, Ludhiana, Hyderabad, Jaipur, Bangalore, Jodhpur, Chennai, Udaipur, Coimbatore, Ahmedabad, Kolkata, Rajkot and Surat.
A loan against your property can be availed of against a commercial or a residential property. You can also apply for this loan if you need funds to acquire a new property. A take-over of your existing loan with refinancing is also possible with LAP.
Normally, one can borrow a minimum of Rs 2 lakh to a maximum of Rs 5 crore in LAP. Deutsche Bank, Union Bank of India and IDBI Bank are among a few lenders who give up to Rs 10 crore loan.
If the property is self-occupied: You may get loan up to 65 per cent of value of property if it is residential and up to 50 per cent if it is commercial.
If property is rented: You may get loan up to 55 per cent of its value if it is residential and up to 40 per cent if it is commercial.
If the property is vacant: You may get loan up to 55 per cent of its value if it is residential and up to 40 per cent if it is commercial.
Longer tenure = More interest outflow: Most LAP borrowers get comfortable with monthly repayments that stretch to as much as 15 years. While this means borrowers can enjoy a comfortable longer tenure of repayment with lesser EMI burden, it also means that you pay more interest.
For example; a person with a LAP of Rs 10 lakh for 15-year tenure will pay Rs 12,002 as EMI, assuming the interest rate is 12 per cent. This means you pay Rs 21.6 lakh including principal and interest.
Now, if you take the same Rs 10 lakh LAP for 10 years, you will pay Rs 14,347 as EMI. However, your total outgo will be Rs 17.21 lakh. Similarly if you reduce the tenure by five years, you save Rs 4.4 lakh although your EMI is 20 per cent more.
“A longer tenure is just for the borrower’s convenience. If the borrower is okay with a shorter tenure, that is good. Most borrowers want a longer tenure to avoid any major change in their monthly budget,” Rakesh Makkar, executive vice-president & head, urban and rural business, Fullerton India, said in a recent interaction.
Longer or shorter tenures aside, the LAP business is making money for lenders. Rating agency CRISIL believes LAP will remain an attractive segment for both borrowers and lenders. For borrowers, it affords increased monetisation of property through larger loans and longer tenures compared with traditional funding. For lenders, LAP offers strong growth potential coupled with high profitability.
Property in bank custody: LAP will mean that the property will be locked up with the bank from the day you have taken the loan and till such a time you have repaid it in full. This is why experts advise against taking LAP for long tenures.
Taking a LAP for a longer tenure means not only higher interest outflow, but also locking in your property for those years. “Suppose you have taken a LAP for your business, and after three years, you need funds for your child’s higher education. As most education loans are offered against collateral, you will be asked for one. If your only property is with a bank, you may not be able to avail of an education loan,” says Shetty.
Yet, there are situations where loan against property is the only way out.
Samir’s elder son Yogesh was going for an education course with a college. An education loan gets rejected if the course is not approved by University Grants Commission (UGC) or All-India Council of Technical Education (AICTE). “What should you do if you are sure that unapproved colleges hold better promise and you do not have a source of funding? In such a situation, you can mortgage your home with the bank to avail of loan against property (LAP). In this case, banks do not ask you about the end use of the loan amount. While the repayment tenure of an education loan is a maximum of eight years, LAP has tenure of 15 years,” says Rishi Mehra, co-founder, deal4loans.
Samir unfortunately could not use the LAP route to fund his son’s education because he had already locked up his residential property and commercial office for business needs via a 15-year LAP. Once you take LAP for a property, the same cannot be used to take another loan.
No tax benefit and longer processing time: Unlike a normal home or education loan, there is no tax benefit if you opt for a loan against property. “This point is very important. LAP might seem similar to a home loan in terms of interest rates and long tenure but in this respect it’s definitely not. You will get zero tax benefits,” avers Manish Sharma, a financial adviser.
This is another disadvantage for people seeking LAP So, if you expect tax benefits against your loan repayments, you might want to consider other forms of loans. For example, you can avoid taking LAP to fund your child’s education and opt for an education loan instead.
“In LAP, the entire loan amount is released and liability of interest payment begins immediately. This means your repayment liability begins even when the course is underway,” says Mehra.
If you need funding for an immediate requirement like paying a heavy medical bill, LAP may not be a viable option for you, says experts and bankers.
Just like a home loan, the credit approval of LAP is a long process wherein the bank goes through your income documents as well as all the property-related documents.
Lenders will usually ask for copies of all documents of the property concerned that you chose to pledge for the loan. Some ask for all title related documents along with approved sanction/building plan. Plus, during loan processing additional documents may be asked for. They will also initiate a technical evaluation of the property, resulting in a turnaround time of anywhere between 4 to 10 days, or even more, Mehra says.
“Lenders have teams which do the technical and legal work. Without their clearance, loan will not be disbursed. Often we come across issues at the due diligence stage. Borrowers who are in a hurry to get a loan should opt for personal loans,” said Sudip Basu, a property adviser.