In real time situations we can come across the need of finance either for our kids for further studies or we have to arrange funds for the grand dream wedding of our daughter. The first question that comes in our mind is “from where to arrange for the money?” Though there are many options available in the market but the best way is to avail a loan. We can opt to borrow a personal loan or we can go for a loan against property. Obviously being a secured loan against property (LAP) has its own positives over personal loan.
Loan Against Property can easily be availed on our possessed property. The property that we own is our lifetime achievement, a solid asset and a key to our dreams. Loan Against Property as the name suggests the Loan borrowed against your personal property is a multi utility loan that can solve your business or personal financial problems.
LAP is a secured loan where the borrower uses his property as a security to the loan. This gives the right to the Bank/ NBFC to repossess the property and sell off to recover the loan amount in case the borrower is unable to repay the loan amount. It is a long term loan that requires fixed monthly payments for the period of 1 to 15 years, depending on the present conditions.
LAP can also be described as “when a borrower gives consideration in the form of collateral for a financial benefit of with the condition that the convenience provided by the Banks/ NBFC/ other financial institutions will become void in case of non repayment of the loan.”
There can be various purposes to avail a loan against property that includes any medical emergency, a dream vacation, funding a medical treatment or may be a new venture or to expand the current business. A private property of self occupied or a rented residential property and a commercial property like a house, a shop, gowdown or a stock room or it can be a piece of land that can be used to attain the loan.
Though, the eligibility criteria vary with every financial institution but following are the common factors among all the hosts:
- Income, savings, debt obligations
- Cost/ value of the property mortgaged
- The repayment tract for the other debts, loans, credit cards etc
The interest rates offered to you depends on many factors including your credit score, credit rating, market reputation, debt obligations etc. But generally the rate of interest ranges between 9.25% – 11%and the tenor can be from 1 year to 15 years.
There can be several factors that broadly define the characteristics of LAP but completely depend on the local regulation and legal requirements.
- Interest: You may get a loan on a fixed rate of interest for the life or variable rate of interest for the loan and can change at certain pre-defined periods; the interest rate can also be higher or lower respectively.
- Term: Mortgage loans or LAP generally have a longest term i.e., the number of years after which the loan will be repaid. Some loans may have no fixed series of installments, or require full repayment of any remaining balance at a certain date.
- Payment amount and frequency: This means the amount paid for every installment and the frequency of payments. In some situations, the amount paid towards every installment may change or the borrower may opt to increase or decrease the amount payable.
- Prepayment: Some time prepayment of all or a portion of the loan may be limited or restricted, or may require an extra amount as a penalty to the lender for prepayment.
The two basic types of amortized 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 throughout the loan whereas in case of linear payback, the periodic payment will gradually decrease.
- In a Floating or a variable rate mortgage, you may avail the loan at fixed rate of interest for a certain period of time after which it will periodically adjust up or down as per the market index. Floating rates transfer a part of risk of the interest rate from the lender to the borrower and therefore are widely used where fixed rate funding is difficult to obtain or comparatively expensive. Since the risk is being transferred to the borrower, the initial interest rate may be the size of the differential price and will be related to present debt market conditions including the yield curve.
The charges of the borrower depend upon the credit risk in addition to the interest rate risk.
While borrowing a loan for the purchase of a new property, lenders usually require that the borrower should make a down payment i.e., contribute a portion of the cost of the property. This down payment is 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 loan in which the buyer makes a down payment and also takes a loan, the value to ratio varies from 50% to 80%. The loans borrowed against the properties that the borrower already owns, the loan to value ratio will be calculated against the estimated value of the property.
The loan to value ratio is considered to be an important indicator of the riskiness of a 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.
How LAP differs from Personal Loan..?
Though the documentation for these loans varies with every Bank/ NBFC to another but generally require the documents as follows:
The loan against property is one of the best ways to borrow a large sum of money for any financial 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 within the specific period. The only disadvantage of this loan is that if the borrower is unable to repay the amount to the fullest, the Bank/ NBFC/ any other Financial Institution has full right to repossess the property, legally foreclose and auction off the mortgaged property.