Your Money: Busting six myths about loan against property

September 29, 2020 4:15 AM

With the interest rate as low as 8.75% per annum and tenure going up to 15-20 years, loan against property (LAP) can be a good option for funding relatively large scale personal or business needs.

An individual can also open a recurring deposit account where the monthly interest will be deposited for five years and also earn recurring deposit interest rate of 5.8%.

By Ratan Chaudhary
Loan against property allows you to leverage the assets you own and use it as collateral to borrow money for meeting financial emergencies. With the interest rate as low as 8.75% per annum and tenure going up to 15-20 years, loan against property (LAP) can be a good option for funding relatively large scale personal or business needs. But before you go ahead and avail loan against property, it would be prudent to stay clear of these myths.

Myth: Pledged property can’t be used by borrower
Pledging your property for availing loan does not put any constraints on its usage. As owner of the pledged property, you retain full possession of the collateral as long as you don’t default on the repayment. Being a secured loan, lenders have the right to recover outstanding dues by auctioning your property in case you default.

Myth: LTV ratio can go up to 100%
LTV ratio is the proportion of property’s value that a lender can finance through a loan. While availing a loan against property, many prospective borrowers have the misconception that loan against property can be sanctioned for an amount as high as 100% of the market value of the property. However, that’s not the case.

The maximum loan amount depends on the valuation of mortgaged property, and lenders usually approve loans up to 50-70% of the property’s market value. Factors such as location and age of the property, infrastructure, geographical stability, etc. are also considered during the evaluation process. Loan disbursal time may usually range anywhere between one week to three weeks.

Myth: Restriction on end-usage of funds
Most of us assume that loans against property come with restrictions on end- usage of funds. However, in reality, just like 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. Borrowers can put the loan proceeds towards various purposes such as business expansion, child’s higher education, working capital needs, etc.

Myth: LAP involves shorter tenure
Contrary to this myth, loan against property involves longer tenure which may go as high as 20 years. Other loan options such as personal loan, gold loan or top up home loan usually involve relatively shorter tenures of up to five years, three years and 15 years, respectively.

Myth: Only residential property can be pledged for loan
Most lenders accept residential property and commercial property to be mortgaged for borrowing loan against property. Some lenders also allow industrial property to be pledged for availing the loan.
Myth: Loan amount is disbursed basis purchase price of property

Loan amount is determined on the basis of the current market value of the property. During evaluation of property’s market value, lenders factor in the location and age of the property, infrastructure, geographical stability, etc. Post evaluation, the loan amount is finalised after factoring in borrower’s repayment capacity, credit score, fixed obligation to income ratio etc.

The writer is head of Home Loans, Paisabazaar.com

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