Loan Against Property
Loan against property (LAP) is also known as ‘Home Equity Loans‘ and is basically a kind of loan against the security of one’s property. LAP is designed to meet the financial needs of a person who already owns a house, which is free from any encumbrance (i.e. it is not given as security for any purpose).
In other words it actually connotes – a loan given or disbursed against the mortgage of property. One can now take a loan against one’s self occupied residential or commercial property, to expand his business, plan a dream wedding, or fund one’s child’s education and much more. However, one needs to give a declaration stating that these funds will not be used to carry out any illegal activities or for any speculative purpose.
The loan is given as a certain percentage of the property’s market value (usually around 40 per cent- 65 per cent). But the threshold amount is generally defined by most lending institutions. Usually, banks and other lenders extend a loan against property as a security, for up to 50 per cent of the market-value of the property. However, the extent of the loan is also subject to your eligibility as per income norms which also are stricter than home loan norms.
What are the advantages of a Loan against Property?
To begin with, it works out to be much cheaper than a personal loan, which is usually issued at interest rates in the range of 12-25 per cent. This is generally on a daily or a monthly reducing balance method. The rate at which LAP is issued is in the 12.50 per cent-15.75 per cent range. The lower rate is partly because the lending entity has a security in the form of the housing mortgage vis-a-vis a personal loan that is given without any security.
The tenure for LAP is longer than that for a personal loan. LAP is given for tenure of 1-15 years. Since the rate of interest is lower, many a times, equated monthly installments of LAP turn out to be cheaper than those under personal loans. But the tenure has to be lower than the residual age of the property as approved by the valuer of the Bank.
The criteria for LAP are the same as those for any home loan. Part prepayment as well as full prepayment of LAP is also allowed by most lending institutions; many lending institutions do no levy extra charges on prepayment.
The eligibility requirements of the Bank for a customer to qualify for this product are similar to those of a normal home loan. LAP is either given as an overdraft facility (which means it is for 1 year and renewed every year) or for as a normal loan.
How is interest charged on Loan against Property?
Some financial institutions make LAP available only under the floating rate. Fixed rate loans are off limits. Borrowers need to enquire before finalizing a LAP from lending institutions.
It is normally available for residential properties only, but can be available for commercial property also.