Some of us would have, at some point in life or the other, faced a situation where we had to raise substantial amount of money to meet a requirement. While there is always the urge to go for personal loans, it should ideally be the last choice. For various reasons. One, personal loans though easy to come by, are costly. Two, the tenure is usually short.
And most importantly, there are cheaper ways one can raise funds. One such useful option is loan against property (LAP), especially if the financial requirement runs into a few lakhs. LAP, as the name suggests, is loans given by banks against property owned by a customer. The customer must mortgage the property with the bank before the lender disburses the loan. The mortgage can be residential or a commercial property that is self-occupied, leased or a rented one.
It can also be a piece of land. LAP is cheaper than personal loans and the loan can be taken for a long period like 10 years or even 15 years. Also, unlike personal loans, even those with poor credit score can avail LAP. These types of loans worth both ways – raise funds at cheaper rates and also help monetise idle assets. Nowadays, the interest for LAP is calculated on one-year MCLR also known as the base interest rate plus 1-1.5 per cent as spread. So, the total interest rate ranges from 10-12 per cent. The interest rate would vary depending on the loan amount and the bank.
While the lending criteria will vary according to the bank, generally, the loan amount can be up to 60-65 per cent value of the property being pledged. Financial institutions also prefer LAP because the loan is backed by an underlying asset. However, the process can take some time as the bank or NBFC will scrutinise the documents related to the property before giving away loan. The entire process can take anywhere between two weeks and a month as it involves thorough examination of the title deed,which is an important document that mentions the present owner of the property. It is the responsibility of the customer to have a clear title deed without any discrepancies.
The banks, on their part, will crosscheck the owner of the title deed with the authorities concerned in the sub-registrar office and a lawyer. One of the key points to be kept in mind while scrutinising the title deed is the survey number and the link documents. Most banks ask for the owners of the property for the last 30 years. So, to be on the safer side, customers should be ready with the title deed and the link documents to avoid any rejection of their loan application.
The other document that is important from both bank and customer’s perspective is the encumbrance certificate (EC) that is obtained from the sub-registrar office. This document gives a guarantee that the said property is free from any charge and does not have any monetary or legal liability from previous owners. However, LAPs have a few disadvantages, too.
One is that the customer could lose his ownership of the property if he defaults on the loan. Secondly, the bank will determine if the individual is able to service the interest of the loan under LAP. The value of the property may run into crores but if his income does not support his loan payment capacity, the bank may drastically reduce the total loan disbursed. Then, there is no tax incentive for interest or principal amount paid towards this loan except for businessmen. Having said that, if one weighs the pros and cons of LAP, it seems to be a cost-effective financial product if one’s liquidity requirement is on the higher side of the seven digit figure.
IMPORTANT DOCUMENTS
There are two documents that the customers should be ready with before applying for LAP. One is the Title Deed that clearly mentions the owner of the property. The other is the encumbrance certificate that ssures there is no liability associated with the property