Lenders could ask for more collateral if house prices fall
A Loan Against Property (LAP) is a popular secured loan in which your residential or commercial property is pledged as collateral with the bank to qualify for the loan.
The LAP is a secured credit instrument in which your property constitutes a legal asset to secure the amount of your loan.
As a potential borrower, you can pledge residential or commercial property to qualify for the loan. If you own both residential and commercial property and want to borrow a large amount, it makes more sense to put your commercial property as collateral than to pledge your residential property.
You can benefit from an LAP by pledging one of these elements as collateral with the lender:
The maximum amount you can borrow depends on the appraisal of your property – the loan amount cannot exceed the current market value of the property
LAP can be used for everything from planning a wedding to financing education expenses abroad, travel and business, among others
Like how home loans work, LAP also offers flexible occupancy options. While the maximum term for home loans is 30 years with many banks, most lenders allow a maximum term of 15 years for LAPs.
Lenders typically penalize around 60-65% of the property’s value. You can choose a flexible repayment option, transfer your loan, make partial repayments or pre-close your loan before the end of the term.
Things to keep in mind
If you’re considering taking out a loan on your existing residential or commercial property, here’s what you need to know:
Your property is not the only instrument that determines your loan approval. Lenders assess a set of parameters before approving your loan. Aspects like your credit score, repayment history, and income are also important influencing factors. Representatives from the bank or non-bank finance company will first assess your property before sanctioning the loan. in full You can choose the duration of your choice depending on the size of the loan amount and your ease of repayment. Maximum term is 15 years in most cases – longer terms attract lower repayment amounts than short terms
There are no tax benefits associated with LAPs. If you have an outstanding home loan on the current property against which you have made use of an LAP, you can claim tax benefits on it.
Partial payments and pre-closing your LAP do not incur any additional fees and charges. You are free to make as many partial repayments as you want (usually after you have completed a certain period of your loan term – usually one year) and to pre-close your loan well before your term ends.
If your current property for which you wish to benefit from an LAP is owned by more than one person, the additional person (s) automatically qualify as co-applicants. Thus, in cases where several people own a certain property, they should be informed and their signatures should be obtained on the loan documents.
Impact of the fall in real estate rates
Falling house prices are a major risk for the LAP segment, and lenders have struggled with NPAs in this segment for the past few years. That said, home rates are almost always doomed to fluctuate, and asking for additional collateral following a mortgage rate crash can certainly be a possibility in the near future. However, a complete collapse is unlikely to occur in the near future. LAPs therefore remain a major portfolio for banks and NBFCs.
LAP acts as a brilliant tool for debt consolidation. So if you have a few unsecured loan accounts with a small home loan or car loan, you might want to consider taking out an LAP to consolidate your debt.
The writer is founder and CEO of Qbera.com