5 Things to Remember Before Taking a Loan Against Property

A loan against property is one of the most practical ways to avail of a loan to meet your various financial needs. Mortgaging an asset in lieu of a marginal interest rate for a fixed loan tenor is a profitable deal. A loan against property is a secured loan and its biggest advantage is that there is no restriction on the end-use of the loan. You can use the funds from a loan against property for any purpose, including investing in a business project, financing your children’s education, meeting marriage expenses, or refurnishing your home. Many lenders charge around 1 to 4 per cent of the total loan amount as processing fees and there is also a penalty for foreclosing a loan. 

Borrowers must also know that unlike a home loan or education loan, loan against property does not provide any tax benefits. Therefore, it is advisable not to avail of this type of loan for educational purposes or home purchase.

Financial emergencies can happen at any time, and we have to be prepared for any untoward future events. A loan against property is an important scheme that could help in case of a financial crisis. This scheme helps in keeping our savings intact and since it is offered at a low-cost EMI and has a long repayment tenor of 15 to 20 years, it is widely used by salaried as well as self-employed individuals to tackle financial emergencies. There are key points that you should keep in mind before opting to avail of a loan against a property.

Know the type of Property that could be mortgaged

Any real estate property that is legally in the name of the applicant can be used as a mortgage to avail of a loan against the property. The type of properties that are eligible for a loan against property is residential properties (self-occupied, rented, or empty), commercial properties (self-occupied, rented, or empty) or under-construction properties. However, the under-construction properties should be under an authorized builder and the construction must be 90 per cent complete to avail of a loan. Agricultural plots of land and any property built over illegal or agricultural land are not eligible for a mortgage under loan against property.

Know the Valuation of your Property:

It is advisable to take an expert’s view to evaluate the valuation of a property as per the current market rates. This will help in assessing the loan amount that you wish to apply for. Most lenders pay loan amounts equal to around 50 to 90 per cent of the value of a property. The final sanctioned loan amount also depends on the condition, location, and age of the property. A new residential property with a high resale value will help in availing of a higher loan amount than any old commercial or residential property in a rural area.

Try to opt for a Low Interest Rate

A lower interest rate on a loan will lessen the burden of repayment. The interest rates charged on loans against property primarily depend on the valuation of the property. A high-valued property will help in availing of loans at lower interest rates. The other factors on which your interest rate will depend when you avail of a loan against property include your job profile, type of profession, credit score, and monthly income. Higher and stable monthly income, a disciplined credit history, and a secured job profile are some factors that will help to lower the interest rate on the availed loan. Doctors and chartered accountants are given attractive interest rates on loan against property.

Choose your EMI according to your Repayment Capacity

While availing of a loan against property, you keep your property as a mortgage. The property rights of ownership are transferred to the lender if you default in repaying the loan amount for a specific period. Therefore, your EMI payment must be seamless without any default. As a rule of thumb, your EMI should not exceed 60-65 per cent of your monthly income. Use the EMI calculator before availing of a loan against a property to understand how much can you afford.  

Keep Buffer Time in Mind

The processing time for allocation of money under loan against property is considerably longer than any other loan, such as a home loan or personal loan. Application formalities, documents verification, and other legal verifications take a lot of time. Therefore, for any urgent financial needs, a loan against property is not an ideal deal. Therefore, if you are planning to apply for loan against property, it is advisable to apply a month before you need money.

Try to understand the service terms and benefits that can be availed of from lenders before applying for a loan against property. Careful examination of the above points will help you in understanding the loan against property procedure, thereby ensuring a hassle-free disbursal of loan money in your account.

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