A loan against property or mortgage is used by a person looking to start a new venture or by a person looking to invest in real estate. This loan involves using your currently-owned property as a guarantee for payback. If you fail to do so, the person/company that lends the funds can sell your property.
When you apply for such a loan, you need to be aware of a few points, so that your loan application is processed successfully, and you get the amount you are looking for.
- Interest rates
Another advantage of such loan is that the interest rates are much lower than that of a personal loan. While this loan will not be as competitively priced as a housing loan, it will be economical as compared to personal loans.
The reason is not too difficult to understand. In a loan against property or LAP, the borrower mortgages his house, making the loan a secured one. A personal loan is unsecured. Personal loans from banks usually start from 13.75 percent and can go as high as 25 percent, while those from NBFCs are offered at flat interest rates. LAP, on the other hand, is available at around 11-14 percent.
- It has universal application
This type of loan can be used for multiple purposes. You can avail it to purchase factory equipment, purchase of mercantile real estate like office spaces, shop, or a factory, or to pay off debts. It can be for personal utilization like paying off a debt or for your child’s education or marriage.
A loan against your property can be taken against a commercial or residential property. You can also apply for this loan if you need funds to purchase a new property.
- Geographically limited:
LAPs can only be taken against properties that come within the geographical radius that the bank mentions. For example, Grihashakti has a pre-determined list of cities it services for this type of loan. You need to check with their officials or visit the site before applying to avoid disappointment.
- Terms and conditions:
When applying for a loan against property, make sure you are aware of these stipulations:
- If your property is residential and self-occupied, you can get about 65% of its value in a loan, and if it is a commercial property, you may get up to 50% of its value in a loan.
- If your property is rented and residential, 55% of its value is available, while 40% is provided if commercial.
- If your property is vacant and residential, you may get 55% of its value, while 40% amount can be availed of if commercial property.
- Custody of the property
From the day your loan starts, your property will be locked up in custody of the moneylender or the bank. The day you finish paying off the bank, your property is returned back to you. In between this time, you cannot sell this property even if you are the owner.
These are a few factors that should be taken into consideration before taking a loan against property. Although it is better than pulling up a loan from the bank, it can be risky unless you are fully able to pay off the loan. It is always advisable to take all these factors into consideration before taking such loan.