If you are in dire need of additional financing, Loan Against Property (LAP) is one of the cost-effective measures. LAP allows you to unlock the value of your property and leverage it to raise a loan. Under LAP, your property (residential, commercial or industrial) is used as a collateral or security to borrow from a bank or a financial institution.
There’s one similarity between LAP and a personal loan in that both are borrowed for personal need and the end purpose of the loan is not defined as it can be used to meet a variety of financial needs. For instance, you can use the loan amount for business expansion, to meet education/marriage expenses, for purchase of a new house, for improvement/extension of existing property, for medical treatment and any other personal need.
However, unlike personal loan LAP is cheaper, has longer loan tenure, and requires simple documentation since it’s a secured loan.
Normally, under LAP you can expect to get up to 50-60% of the value of your property or twice your annual salary/income, whichever is lower. The loan-to-value (LTV) ratio however differs from bank to bank. IDBI Bank for instance loans up to 65% of the market value of the property if it’s residential self-occupied, up to 55% of the market value of the property if it’s residential leased out and up to 50% of the market value of the property if it’s commercial/industrial.
How much you can borrow also depends on your repayment capacity. The tenure of the loan is generally 5-15 years or 60 years (for salaried) and 65 years (for self-employed), whichever is earlier. The rate of interest varies between 12.50- 15.75% per annum. The Interest rate of the lender however is based on its Retail Prime Lending Rate (RPLR) which varies as per the money market conditions.
Banks can also allow joint loan as well. In case of Kotak Mahindra Bank, for instance, if you are an individual – your spouse, your parents, or even your major children can be your co-applicants. The co-owner of a property has to be a co-applicant, but a co-applicant need not be the co-owner of the property.
How To Get It
LAP can be borrowed by individuals engaged in trade/business, professionals, self-employed, salaried people, proprietary/partnership firms, companies (private/public limited), HUFs, societies, among others. Some banks however, don’t lend to NBFCs, trust and partnership firm where HUF is a partner.
The documentation required for loan application processing broadly comprises all title related documents along with approved sanction/building plan, ID proof, income proof and residence proof. In case of salaried class, the income proof could be latest salary slip or Form 16 along with recent salary certificate and last 6 months bank statement. In case of self employed professionals, proof of income could comprise last two-three years’ income tax returns, last 3 years profit/loss and balance sheet statement, last 6 months bank statements, education qualification certificates and proof of business existence.
Fees & Charges
Normally, banks charge up to 1% of the loan amount plus service tax as processing fees for salaried individuals, while 1.5% of the loan amount as processing fee from self-employed professionals/non-professionals. Plus, you’re allowed to prepay LAP but be ready to pay for it.
Axis Bank, for instance, charges 2% if the amount exceeds 25% of the principal outstanding during a quarter. Otherwise the bank doesn’t charge any penalty. Further, in case of HDFC Bank, if you want to pay post 6 months from the disbursement of LAP and up to 60 months, the bank charges maximum of 2.5% of the principal outstanding. However, post 60 months after the disbursement of the loan, there are no pre-payment charges. The bank also doesn’t allow part pre-payment until six months of repayment.