What is the Purpose of a Loan Against Property? Here’s Everything you Need to Know

Your home is one of the most valuable assets you’ll ever own because it will protect you from the elements and keep you dry for the duration of the building’s useful life. For instance, a property owner who needs cash badly doesn’t have to take out expensive personal loans. Instead, he or she can get a loan against property (LAP) to cover the short-term financial need. A loan against property is a unique way to use all of the money that can be made from an immovable asset while still keeping the title.

You can get money right away by using your property as collateral for a loan against it. It is a popular choice because it has a long time to pay it back and a low interest rate.

What is a loan against property (LAP)?

In India, an “LAP” is a home loan you get against a property you own. It has become a popular kind of long-term loan in India, especially among self-employed people, because the loan terms are longer and the interest rates are lower.

Can I borrow money for my house?

All properties, including homes, factories, and offices, are fair game for an LAP. In the case of residential property, it could be a rented property or a property that the owner lives in. This includes apartments, flats, single-family homes, and so on. Commercial property is made up of things like office spaces, stores, shopping areas, complexes, and so on. If you own a piece of land or a plot, you could also get an LAP.

Criteria for getting the LAP

Even though this may be different from bank to bank, there are some things that all banks look at: the borrower’s income, debts, savings, history of paying back loans and credit cards, and the market value of the property being mortgaged. Aside from this, the borrower’s job status, maturity level, financial situation, and credit score are also important factors in deciding how much of a loan they can get. Lenders prefer that borrowers pay off debt while still employed. Hence, the upper LAP maturity age for salaried workers is 60 (retirement age in India), while for self-employed individuals, it’s 70.

Benefits of a loan against property

High loan amount with a long repayment term

Depending on the lender’s rules, you can get a loan for up to 60% of what the property is worth on the market. You can also take advantage of the long time you have to pay back the loan (up to 15 years) by making sure you can afford the monthly payment.

Loans can be used for many different things.

The money can be used however the borrower wants. It can be used for various things, from paying for a wedding to financing business and expansion plans. It can also be used to pay for healthcare costs or buy a property or other asset that might not qualify for a loan.

Available to everyone

The loan is not only for people with regular jobs but also for professionals and businesspeople who work for themselves.

Simple process

Compared to other loans, a loan against property requires less paperwork and can be paid out quickly.

Low-interest rates

Since the property is used as collateral, the interest rate is usually lower than a personal loan. The interest rate varies by lender but is usually between 12 and 15%. This is much lower than the interest rate on a personal loan, which is between 15% and 25%.

Tax benefit

You can not only get cash to pay your bills with a loan against property, but you can also get tax breaks. Under section 24(B) of the Income Tax Act, you can get a deduction if you get a salary. The tax deduction can be used for the principal amount and the interest paid.

Documents needed for an LAP

For salaried people:

As proof of residence, a copy of any of the following is acceptable:

• Ration Card
• Electricity bill
• Phone Bill 
• Voter ID Card
• Employer’s Card
• The most recent bank statement or passbook that shows a salary or income has been credited to the account in the last six months
• Payslip for the last six months that shows all deductions
• Form 16 in the last two years
• Copies of all the property papers for the property that will be used as collateral for the loan

Self-employed: 

Statement of financial condition for the past three years

As proof of residence, a copy of any of the following is acceptable:

• Ration Card
• Electricity 
• Phone Bill
• ID Card
• Employer’s Card
• The most recent bank statement or passbook that shows a salary or income has been credited to the account in the last six months
• Copies of all the property papers for the property that will be used as collateral for the loan

Conclusion

One of the best ways to get money is to take out a loan against your property, especially when the property market is doing well. But if the borrower can’t pay back the loan on time or in full, the bank can take the mortgaged property and sell it at auction to get the money back for the loan. Like with any other loan, not paying back on time will hurt the borrower’s credit/CIBIL score and add a penalty to the loan repayment. Before taking out a loan against property, it is wise to think carefully about whether or not you will be able to pay it back and to understand all of the terms.