Should you take loan against property?

Retail loans have seen a spurt in recent times. With the economy 'shining' and salaries heading northwards, individuals haven't really felt the pinch of borrowings as their disposable incomes have risen.

But personal loans have not seen the spangled growth experienced by home loans or car loans. Blame the high interest rates. Individuals though do have the option of going for a loan against property. So how does it work?

Simply put, a loan against property is what it actually connotes -- a loan given or disbursed against the mortgage of property. This is unlike a personal loan, which is disbursed to an individual; no questions asked. The loan is given as a certain percentage of the property's market value (usually around 40 per cent-60 per cent). But the threshold amount too is generally defined by most lending institutions like say, Rs 200,000.

There are various advantages of taking a LAP:

To begin with, it works out to be much cheaper than a personal loan, which is usually issued at interest rates in the region of 16 per cent-21 per cent. This is generally on a daily or a monthly reducing balance method. The rate at which LAP is issued is in the 9.75 per cent-11.50 per cent range. The lower rate is partly because the lending entity has a security in the form of the housing mortgage vis-à-vis a personal loan that is given without any security.

LAP Rates

The tenure for a LAP is usually longer than that for a personal loan. Generally, LAP is given for a maximum tenure of 10 years. Since the rate of interest is lower, many a times, LAP equated monthly instalments turn out to be cheaper than those under personal loans.

LAP, just like a personal loan, can be taken for any reason. The motive for borrowing does not have to be disclosed to the lending institution. Also, 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.

However, the following points have to be borne in mind while applying for a LAP:

Some financial institutions make LAP available only under the floating rate. Fixed rate loans are off limits. Borrowers need to enquire before finalising a LAP from lending institutions.

The 'technical inspection report' of the individual's property needs to be in order. This report qualifies the merit of the property to be mortgaged. Otherwise the LAP could be rejected. Some financial institutions also have a floor on the area of the property to be mortgaged. For example, the area has to be say, at least 400 square feet for the FI to give a LAP.

LAP is generally allowed against residential property. In other words, you cannot borrow by mortgaging your commercial premise. In fact, even if you own the property, which is rented out, or you own a property but aren't staying in it (e.g. a farmhouse), then too you might not be eligible to take a loan against that property. But of course, some lending institutions do not have any such criteria. Here too, the borrower needs to be aware of what is on offer and act accordingly.

Many housing finance companies allow individuals to take LAP if they have taken a housing loan from them. The only pre-requisite- a minimum of one year's EMIs need to have been paid on the home loan.

All in all, LAP proves to be a useful proposition. In fact, more so in case some individuals have been disqualified for the purpose of a home loan.

There is a certain set of individuals to whom HFCs are apprehensive giving a home loan. For example, artists or individuals in the modelling profession are not looked at with a favourable disposition by HFCs. Such individuals can always opt for a LAP in case they have a property in their name.

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