March 10, 2017 No Comment. Posted in Home Loan

There are lots of real life situations when we need finance either for our business or our personal needs such as to send our kids abroad for higher education or a wedding of our child. The first thing that comes to our mind is “Where would I get the money from?”

There are lots of ways to arrange the finances and one of them is to take a loan. Either we can take a personal loan as per our required amount or if the requirement is higher we take an option of a loan against our property.

The property that we own is our greatest assets and hold a key to achieve our dreams. Loan Against Property (LAP) – as the name indicates that the loan given against our property is a multi – purpose loan that can shelter our business or personal needs.

LAP falls in a secured loan category where the borrower gives a guarantee and uses his property as security collateral. This security allows the lender to take possession and sell off the property to recover the loan amount in case of the borrower is unable to repay or abide by its terms. It is generally structured as a long term loan. The most basic arrangement would require a fixed monthly payment over a period of ten to fifteen years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortisation.

Mortgage can also be described as “a borrower giving consideration in the form of collateral for a financial benefit with the condition that the convenience provided by the financial institution will become void in case of non repayment of the debts.”

Any new business venture or the expansion of our current business, funding medical treatments or a dream vacation can be few other purposes to attain the loan against property. A private ownership of self occupied or a rented residential property and commercial property such as office, shop, warehouse, industry or even a piece of land can be kept as a guarantee for the loan.

Though the eligibility criteria varies from an institution to institution but from all the host factors along with borrower’s credit rating the common factors include:

  • Income, savings, current loan obligations
  • Cost/ value of the property mortgaged.
  • The repayment track record for the other loans, credit cards, etc.
  • Legality in the ownership of the property.

Interest rates on loan against properties ranges between 9.25% to 11% and tenure can be from 1 year to 15 years.

 

There are several factors that broadly define the characteristics of the mortgage but are subjected to local regulation and legal requirements.

  • Interest: Interest may be fixed for the life of the loan or variable, and can change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
  • Term: Mortgage loans generally have a maximum term i.e., the number of years after which an amortised loan will be repaid. Some mortgage loans may have no amortisation, or require full repayment of any remaining balance at a certain date.
  • Payment amount and frequency: The amount paid per period and the frequency of payments. In some situations, the amount paid per period may change or the borrower may opt to increase or decrease the amount paid.
  • Prepayment: Some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.

The two basic types of amortised loans are the fixed rate mortgage (FRM) and adjustable-rate mortgage (ARM) (also known as a floating rate or variable rate mortgage).

  • In a fixed rate mortgage, the interest rate, remains fixed for the life (or term) of the loan. In case of an annuity repayment scheme, the periodic payment remains the same amount throughout the loan. In case of linear payback, the periodic payment will gradually decrease. Though this type of loans are not prevalent in today market conditions.
  • In a Floating/ variable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically adjust up or down to some market index . Floating rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be, the size of the price differential will be related to debt market conditions.

Upon making a mortgage loan for the purchase of a property which is termed as Home loan, lenders usually require that the borrower make a down payment i.e., contribute a portion of the cost of the property. This down payment may be expressed as a portion of the value of the property. The loan to value ratio (LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan in which the purchaser has made a down payment and has a loan the value to ratio varies between 50% to 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be calculated against the estimated value of the property which ranges from 50-70% of the market value of the property offered as collateral.

The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan.

Is a Secured Loan different from Unsecured Loan..? Yes!!

Secured Loan

Unsecured loan

The individual takes the loan by mortgaging the property

An individual can take a unsecured loan for any personal use without any security or guarantor

One of the cheapest retail loans after home loans; usually about 9.25% to 11%

Higher interest rates compared to LAP; usually issued at interest rates range between 13% to 16%

Since the rate of interest is lower, frequently LAP Equated Monthly Instalments (EMI) turns cheaper

Since rate of interest is high Equated Monthly Instalments (EMI) are high

Maximum loan eligibility is determined primarily by the value of the property and the income eligibility income

Maximum loan eligibility is determined primarily by individual’s income

Maximum loan tenure of the loan is 1 year to 15 yrs

Maximum loan tenure of the loan is 1 yr to 5 yrs

Loan against collateral security

Loan against personal security

 

Salaried

Self employed Professionals

Self Employed Businessman

Application Form with a latest Photograph

Application Form with a latest Photograph

Application Form with a latest Photograph

Identity & Residence Proof

Identity & Residence Proof Identity & Residence Proof

Latest Salary Slips

Education Qualification Certificates & Proof of Business Existence

 Proof of Business Existence.

Form 16/ITR’s & Income computation

Last 3 years ITR’s (self and business); along with Profit/ Loss and Balance Sheet & Audit reports

Business Profile

Last 3 years ITR’s (Self & Business)Profit/Loss & Balance Sheet & audit reports

Last 1 year Bank Statement

Last 1 year Bank Statement

Last 1 year Bank Statement (Self & Business)

Complete chain of property papers from origination

Complete chain of property papers from origination

Complete chain of property papers from origination

Processing Fee Cheque

Processing Fee Cheque

Processing Fee Cheque

The loan against property is one of the best ways to borrow a relatively large sum of money for any need. It should not be used as a form of risk capital but should be used only when the borrower knows that he would be able to repay it before the stipulated period. The only disadvantage of this loan is that if the borrower is unable to repay the amount to the fullest, the Bank/ Financial Institution has full right to take the possession, legally foreclose and auction off the mortgaged property.