Loan Against Property

Any individual or entity owning property and derives income from the lawful activity is eligible for LAP.

The following types of individuals or entities are eligible for a LAP:

• Sole Proprietorship or Professionals acting individually
• Salaried Individuals
• Partnerships firms or Limited Liability Partnerships
• Private and Public Limited Companies
• Trust and society

Lease Rental Discounting (LRD) is a term loan offered against rental receipts derived from lease contracts with corporate tenants. The loan is provided to the lessor, who is the property owner,  based on the discounted value of the rentals and the underlying property value. LRD work on the premise of rented properties generates a fixed amount of rent for a specified long tenure. Tenants enter into a lease with the owner (borrower) of the property. This agreement mandates a regular payment which is known as rent. The property owner ( borrower) can use this inflow of rent for the duration of the lease period to borrow fund from financial institutions or banks.

The repayment process is streamlined, as rent is directly deposited by the lessee (Tenant) to the bank instead of going to the owner (borrower) and after deducting the EMI due, banker transfer the balanced fund to the Borrower (Lessor). Each bank has its own criteria as far as the amount of the loan against property is concerned. But, on an average one can get up to 70% of the property valuation as loan amount.

Overdraft facility provides the flexibility to the borrower to withdraw money from his account through cheques or other withdrawal processes as and when there is a requirement. The credit is extended by the lender is up to a certain limit known as the overdraft limit; once that limit is exceeded, the borrower will not be able to withdraw money any further. The arrangement of paying the interests is similar to that of the other form of loan. As the overdrafts are of revolving nature, thus instead of repaying the borrowed amount within a fixed time period, the borrower can actually keep on borrowing the money and repaying it simultaneously. This is the reason why overdraft is also known as the revolving line of credit. Under Drop Down OD facility the overdraft limit reduces with a certain amount or percentage of the original limit either monthly/quarterly/half-yearly / yearly and thereby at the end of the tenure the limit zeroed, and the loan is fully repaid. One major benefit of having overdraft is that the borrower can park his free fund in overdraft account and save on interest outlay.

Overdraft facility provides the flexibility to the borrower to withdraw money from his account through cheques or other withdrawal processes as and when there is a requirement. The credit is extended by the lender is up to a certain limit known as the overdraft limit; once that limit is exceeded, the borrower will not be able to withdraw money any further. The arrangement of paying the interests is similar to that of the other form of loan. As the overdrafts are of revolving nature, thus instead of repaying the borrowed amount within a fixed time period, the borrower can actually keep on borrowing the money and repaying it simultaneously. This is the reason why overdraft is also known as the revolving line of credit. Under Drop Down OD facility the overdraft limit reduces with a certain amount or percentage of the original limit either monthly/quarterly/half-yearly / yearly and thereby at the end of the tenure the limit zeroed, and the loan is fully repaid. One major benefit of having overdraft is that the borrower can park his free fund in overdraft account and save on interest outlay.

Turnaround time, in short TAT, is the time required for the lender to process the loan application. TAT starts from the login of the file and ends with loan disbursement.

Loan Against property involves documents such as KYC, Financial documents and copies of co-lateral papers. Financial appraisal, scrutiny of title flow of the collateral and valuation happens simultaneously.

Sanction or Rejection of the proposal is decided in 2 weeks, which includes a valuation and legal scrutiny. One must keep in mind, providing a full set of documents and information in one go, helps the lender to decide faster. On acceptance of the Sanction and signing of the loan agreement, the amount is disbursed to the borrower. The total time taken from signing the application form to fund in borrower account can be completed in 2 to 3 weeks.

If the process involves takeover of loan from another lender, additional time is elapsed in getting the collateral papers from the existing lender and creating mortgage in favour of the new lender. This process itself takes about 2 to 3 weeks, depending on the lender’s policy and place of document storage.

Loan Tenure is dependent on Risk Profile, Credit Score, type of property offered as collateral and scheme under which the loan is sanctioned.

Property Loans are offered as tenure in the range of 5 to 15 Years. Lenders have their policies to offer tenure. Maximum tenure offered for residential property as collateral is 15 years and for commercial/ Industrial / Land at 10 years.

LAP is based on property value coupled with income eligibility. It starts from Rs. 10 Lakhs, and there is no upper limit. The upper limit is dependent on the policies of the lender. However, most of the lenders are comfortable with the loan amount up to Rs. 15 Cr. Lease Rent Discount proposals are generally of very high value.

The repayment of the loan is made through EMIs and should be done according to the repayment schedule of the lender through banking mode.

The lender and borrower can agree on the repayment mode according to convenience. Repayment of EMI can be made through NACH, ECS or SI. The lender set the repayment mode for each loan account to ensure automatic repayment on a specified date. If payment is not cleared through the set process, it is termed as default in payment.

The lender generally collects un-dated PDCs for security purpose and may present whenever EMI get bounced or to take legal steps to recover the outstanding loan.

Businesses which have been established more than 3 years are considered stable, and business entities which are more than 5 years are most preferred by lenders. A business which is less than 3 years has fewer lenders as options and limited schemes to choose from. Lenders have started offering innovative schemes through holistic risk assessment to accommodate businesses having quality cashflow management with better future prospective.

Recent loans taken affect the creditability of the customer in two ways first, decrease in credit score if there are multiple enquiries but few disbursements and second, low or no financial eligibility. Recent loans in the sense that loans are taken in the last 6 months. It indicates that customer is credit hungry unless There is justification of the end-use of the recent loan is taken. For any product other than Income Programme, maximum allowed loans in the last 6 months are 5 and in 3 months is 3. Where the eligibility is derived based on income declared as per Income Tax Returns, there is no restriction on a number of recent loans taken provided there is financial eligibility and customer has justified the purpose of the recent loans.

Rate of Interest is positively correlated with risk involved in the lending. The guiding factors which govern risk and in turn, rate of interest are Credit Score, Loan amount, Tenure, Risk Profile, type of property offered as collateral and scheme under which the loan is sanctioned. Loan against property attracts a rate between 10% to 15% depending on the above factors. However, Lease Rent Discounting (LRD) proposals are priced lesser than normal Loan Against Property, as the rent is confirmed by an AAA-rated corporate, where the default risk is low.

Loan Against property is available under Fixed, Floating or Hybrid Rate of Interest and is linked to the Reference Rate. Reference Rate is dependent on the risk profile of the lender, and Rate of Interest is decided based on the Spread the lender wants to keep over and above the reference rate.

The charges for availing loan may include initial Login fee, Processing fees, documentation charges, stamping, mortgage, affidavit and Notary fees etc.

Certain charges like Documentation Fee, Legal & valuation fees, affidavit and Notary fees are absolute figures, whereas Processing fee, stamping and mortgage fees are a percentage of the loan amount.

Documentation, affidavit and notary fees put together ranges from Rs. 5,000 to Rs. 25,000 depending on the terms of lenders.

The processing fee ranges between 0.50% to 1.50% of the loan amount. Stamp duty and mortgage charges are at actual, which is a fee charged by the State Govt on the lending and mortgaging the assets.

All these charges are borne by the borrower. The borrower either pays upfront or the same is deducted from the loan amount.

Loan to value is the ratio of Loan Amount to Collateral Value. This concept is the key factor for all types of secured loans.

Loan Against property where immovable properties are being mortgaged, LTV varies with the type of properties. Loan to value of the collateral can be as low as 40% and can go up to 90% depending on the policies adopted by the lender. Self-occupied residential properties are considered to be the safest collateral, and lenders offer a maximum loan on such properties where against open land, one may get the lowest loan compared to the value of the asset.

LTV ratio also affects the rate of interest offered by the lender. Lower the LTV, lower mortgage rate as the loan is considered to be less risky with higher co-lateral cover to the loan and higher the LTV, rate is also on the higher end, the loan is considered more risker.

Multiple business entities having common promoters, income from those entities can be combined to get higher eligibility. The lender insists on taking all the entities considered for eligibility calculation as parties to the loan structure.

ROI can change according to the quality of the collateral offered. Co-lateral which are self-occupied and residential in nature, commands best of the interest rate. A let out a residential or commercial property as collateral increases the rate of interest by 1 to 1.50% than self-occupied residential property as collateral. Rate of interest on loans based on collateral which are used for industries, hotel or other commercial purpose attracts in the range of 12 to 14%. Open land as co-lateral attracts a rate of interest upwards of 14%.

Existing Loans are part of credit decision making. The lender verifies the repayment track of existing loans and impact of existing loans taken on business to determine borrower had used the borrowing effectively in the business. There are no restrictions on having multiple loans as long as such loans are justifiable, and the borrower is still eligible for a further loan. However, lenders prefer to evaluate such borrowers more stringently than a borrower with fewer loans.

LAP offers below benefits to make the most preferred loan products among any property-backed loan:

– Lower interest rate: As the loan is taken keeping the property as collateral, the rate of interest is generally lower when compared to any other kind of loan.

– Lower to zero pre-payment charges: One can close LAP by making pre-payments towards the loan without attracting any penalty if the loan is in an individual capacity.

– Easy accessibility: As these are secured loans, lenders are more than willing to provide these loans.

– Longer tenure: These loans are generally available for longer tenure going up to 15 years. There is an inverse relationship between tenure and EMI. Longer the tenure lower will be the EMI and vice versa. As these are available for a longer tenure, these become suitable for people who can’t afford to pay higher EMIs. However, it is always advisable that a person should take a loan for the shortest tenure as the interest burden will be lower in case of short tenure loan.

One can claim tax exemption from a loan against a property if the loan amount is utilized for business purposes. In such cases, benefits can be claimed against interest paid and associated fees and charges incurred. These payables can be claimed as business expenses under Section 37(1) of the Indian Income Tax Act. There is no relief on the principal repaid. There are no tax exemptions if the borrowed sum is utilized to fund personal expenses like family function, higher education, medical expenses or utilizing the funds to transform the mortgaged property, etc.

If the borrowed fund is utilized for business, it is advisable to keep the entity as a party to the loan structure and loan disbursement as well as repayment to route to the business account.

Salaried individuals can also claim benefits under Section 24(B) of the Income Tax Act if the borrowed funds are utilized for funding the purchase of another residential property. The maximum deduction one can claim Rs.2 Lakh. However, it will only be allowed as deduction if one could successfully establish the borrowed funds are utilized in accordance with Section 24(B) of the Income Tax Act.

Loan Against property, though it is the most popular secured loan borrower prefer, this comes with few of the disadvantages to the borrower. One need to be aware of the same before borrowing.

– Bank has the right to sell your Property: Since the Property is the collateral, the lender has the right to sell your property to recover the dues in the event of default in repaying the loan. One should not avail the loan, unless is sure of honoring the obligations both principal and interest.

– Long time for approval: This type of loan takes long time for approval, unlike Business Loan. The lender needs to satisfy themselves over the clear title of the asset and it is free of any encumbrances. They evaluate various other legal aspects and due diligence, since the loan is lent for a fairly longer tenure.

– No tax benefits: This is one of the big disadvantages of loan against property as the interest paid have no tax benefit, unlike a home loan. However, if the loan is borrowed in the business name and used for business, the interest paid is allowed as expenses.

Loan against property has a prominent feature of non-monitoring of end-use by the lender. The lender asks for in-depth details of loan usage and additional supporting documentation but does not monitor the loan usage once disbursed. However, such fund cannot be utilized for investing in the stock market or speculation transactions. The lender insists on documenting declaration form the borrower that the fund is utilized for investing in the stock market or speculation transactions.

Top up is the loan facility given by the lender based on servicing of an existing loan.

In case of LAP, if the borrower has paid 18 months of the sanctioned tenure, the lender may offer an additional loan. Such additional loan is called Top Up and is subject to verification of income documents, re-valuation of the co-lateral and other eligibility criteria laid down. Generally, the top-up loan is restricted to 1.20 to 1.50 times of the existing loan, offered as a fresh loan which would run parallel to the existing loan.

Top up is the loan facility given by the lender based on servicing of an existing loan.

In case of HL, if the borrower has paid 18 months of the sanctioned tenure, the lender may offer an additional loan. Such additional loan is called Top Up and is subject to verification of income documents, re-valuation of the co-lateral and other eligibility criteria laid down. This additional loan could be given as Home Improvement loan for additional work to be undertaken to the existing home or offered as LAP. This is offered as a fresh loan which would run parallel to the existing loan.

Properties are undoubtedly the most valuable tangible assets a person can own. They stand to serve as an important source of liquidity when there is a need for fund. Be it for personal expenses or business requirements; these funds can be accessed by Non-Resident Indians (NRIs) by simply taking a loan against their property, without having to sell it.

The process for availing a loan against a property does not vary a lot for an NRI and a citizen of India. Many prominent lending institutions offer the facility as long as the NRI owns a residential/commercial property in his/her name.

Lenders do not prefer to fund loan against properties to PIO or OCI.

Generally, Loan against Properties is offered to the borrower who owns the residential/commercial property. Considering the concept of joint family, LAP can be availed by the borrower based on the properties owned by close family members. The relationships which fall under the category of close family members for this purpose are Parents and spouse.

Existing Loans may be secured or unsecured and maybe running with higher RoI and shorter tenor. It is always advisable to replace high-cost loans to low-cost loans by way of take-over. Due to this consolidation, future outflows fall drastically with lower RoI and higher tenure. Many times, closing of a loan before maturity attracts pre-payment penalty. One must evaluate the option of shifting the loan, keeping in mind the overall cost factor of closing the loan and availing the new loan.

If borrower has sufficient funds, but not enough to pre close entire loan amount, then part payment option can be considered. Such payment brings down the EMIs and the total interest paid and to be paid. This is an easy but effective way to save on the interest outgo during the tenure of the loan.

Lenders allow part-payment up to 20 to 30% of the loan amount twice in a year, beyond which they may charge part-payment charges which is equal to pre-payment charges.

Part-payment option exercised regularly will go towards bringing down EMI amounts, the total interest paid and repaying the entire loan faster.

If the borrower is facing a temporary liquidity crunch, may apply to the lender for extending loan tenure so that EMI burden can come down. However, tenure extension may amount to “Debt Restructuring” as per RBI guideline.

Upon borrowing, the borrower creates the mortgage in favour of the lender and hand over the original documents to the lender. The lender has the responsibility of safekeeping the securities, documents, title deeds till the loan is fully repaid.

The borrower has always had a concern – how quickly one can get back once the loan is repaid and how safe the documents are with the lender.

The Banking Codes & Standards Board of India (BCSBI) constituted by the RBI has recommended banks to put in place mechanisms to ensure that securities and title deeds of borrowers are properly preserved.  Also, banks are to return all securities, documents, title deeds within 15 days of the payment of all dues.

Banks and NBFCs store documents in strong rooms and non-basement storage places that could help against floods and fire.

Nevertheless, on a safer side, we recommend all borrowers to keep a set of photocopies of all the documents submitted to the bank and a letter from the lender listing out the documents in their custody.

Another aspect of document safety is the copies of documents submitted may get misused by fraudsters. To protect from any fraudulent activity, it is advisable to scribe “Submitted to XYZ Bank for Loan Application” on each and every photocopy of a document submitted.

A fall in turn Over or Profit or both affects the eligibility prospect. However, lenders may consider funding based on general industry trend; recovery is shown in last 3 to 6 months or appropriate reason justify such fall may not be considered as risky.

There may be a situation where business and collateral located in a different place. In such case, valuation and legal of the co-lateral is initiated in a place where the property is located, and Income document verification along with discussion happens at the borrower’s business place. One must choose a lender who has facility or operation at both the location to make the process easy.