Loan Against Property: Why do I Need to Show Income Proof?

Property is generally among the first assets people acquire. But, compared to other assets like, say, stocks, it’s relatively illiquid, and poses a bit of a problem when you need quick cash. However, many financial institutions now offer loans against property. So, when Anant Kumar, an engineer with a well-known company, needed a personal loan of Rs 10 lakh urgently, he decided to mortgage his flat for a bank loan.

But to his surprise, the bank asked him for proof of income. “If I am mortgaging my house worth Rs 65 lakh, why am I being asked for income proof for a loan of Rs 10 lakh only?” was his perplexed query.

The answer lies in the illiquid nature of property. It’s not easy for the bank to sell Kumar’s house to recover the loan, if he defaults. As property is not a standard product, its price may vary from area to area and with time. Also, banks will not find it easy to evict existing occupants from the house to sell it.

Therefore, banks prefer that you pay back the loan from your income stream and not by selling the security — that is, the house. Thus, you need to submit your income proof when applying for loan against property.

Do remember that banks will not lend you the full value of the property. You can get only a certain percentage of the value of the property (40% to 60%) or between two and two-and-a-half times your current income, whichever is lower.

You may also like