By Ratan Chaudhary
When people require large sums of money, they often end up selling their property to meet their fund requirements, which also results in loss of ownership of the asset. Instead of selling off your property, whether residential or commercial, it’s better to mortgage it and avail loan against property, as it would not only fetch you the required funds, but also let you retain the ownership of the asset.
Here we explain some vital points to factor in while availing loan against property (LAP).
Lenders generally offer longer repayment tenure for loan against property, stretching up to 15-20 years, which is comparatively longer than other options such as personal loans that usually extend up to a maximum tenure of five years. Since shorter tenure would imply higher EMI payout, consider opting for a higher tenure to lower your monthly payout in the form of EMIs. To reduce the overall interest cost, try to prepay the loan whenever you have surplus funds, but take into consideration any prepayment charges.
Loan amount and disbursal
Maximum loan amount depends on the valuation of mortgaged property. Lenders provide 50-75% of the property’s market value. While evaluating the market value of the property, lenders take into consideration various factors such as location and age of the property, infrastructure, geographical stability, etc. Post the valuation process, the sanction amount is finalised depending upon factors such as customer’s repayment capacity, credit score, debt to income ratio, etc. The disbursal of loan against property usually takes one week to three weeks.
Being a secured form of loan-backed mortgage, loan against property usually involves lower interest rates, starting at as low as 9.65% per annum. On the other hand, other borrowing options such as personal loan or gold loan involve higher interest rates, ranging from 10.99%-24% and 9.24%-26% respectively.
No restriction on end usage of funds
Similar to other borrowing options such as personal loan, top up home loan and gold loan, loan against property does not restrict usage of loan proceeds, except for illegal or speculative purposes. The funds can be used for various purposes such as child’s higher education, business expansion, foreign vacation, etc.
Tax benefits depend upon end usage
Not many borrowers are aware of the tax benefits available on loan against property. Tax benefits depends on the end use of the money borrowed. First, under Section 37(1) of Income Tax Act, the interest paid and associated costs such as processing fee and documentation charges can be claimed as business expenditure. Second, if the money is used for the purpose of financing/purchasing another house property, then, interest repaid can be claimed under Section 24(b), up to Rs 2 lakh in a financial year, provided the borrower is conclusively able to establish a link between the money borrowed and its ultimate use. However, unlike home loans, borrowers cannot claim any tax benefit on the principal repayment of loan against property.
Processing fee and prepayment charges
Just like other loan options, loan against property also involves processing charges, which is usually up to 2% of loan amount. In addition to this, lenders may levy prepayment penalty for loans lent at fixed interest rates or to non-individuals at floating rates, but floating rate based loans granted to individuals borrowers usually do not attract such penalty due to RBI’s guidelines.
Before zeroing on any lender, it’s prudent to compare them on various parameters such as interest rate, tenure, processing and prepayment fees, etc.
The writer is head, Home Loans, Paisabazaar.com