Loan Against Property

Loans against Property ( LAP) / Home Equity( HE):

Loan against Property ( LAP ) is very unique product which couples the feature of a personal loan and a secured loan . This loan product helps in unlocking the value of the most precious asset,” Property” . The end use of the loan is not monitored when compared to any other secured loan which generally comes with a specific purpose. In that sense , LAP is an any purpose loan , but at the same time secured by collateral of property. This loan product is a very powerful one and is the best tool for those looking at debt consolidation. There are several businesses which has obtained high cost funds like unsecured business loans and leveraged themselves to a greater extend, thereby putting pressure on higher interest cost and lower profit margins. LAP perfectly fits for such businesses to reduce their borrowing cost and consolidate debt at lower cost. The other advantage is the tenor for LAP loan is generally in the range of 7 to 15 years, thereby giving the borrower to plan business expansion among other things. Moreover with the appreciation of property, future requirements also can be taken care of . This allows the best use of the property that is owned and at the same time will enable the raising of funds required for various purposes. Also, a loan against property comes with a low interest rate compared to that of a personal loan or home loan.

Characteristics of LAP:

  • The loan is secured in nature.
  • Only those who owe a clear and marketable property can avail this loan.
  • Loan is long term in nature ,usually ranges between 7 to 15 years depending on the use of property.( Commercial or residential)
  • Interest rates are low when compared to unsecured loan.
  • Funds can be used for any personal or business purpose.
  • Best suited for people looking for debt consolidation and business expansion
  • Quantum of loan is high depending on the value of property
  • It increases the future borrowing capacity along with property appreciation.
  • The loan can also be used as a normal overdraft or a dropline overdraft (depending on the lender)

Cash Credit

Cash credit is a  facility which operates in a manner different than that of various other loans. Cash credit comes with a limit and it helps in  the smooth conduct of business. It also helps in reducing  the asset liability mismatch. Cash credit limit is sanctioned for a specific period of time, usually a year. The entity to which the limit has been sanctioned can use the cash credit at any point during the time period and the specified rate of interest will be charged on the amount that is taken or used. It can be operated like any other account. It means withdrawing money when there is a need and then depositing back the payments  received from parties.

Once the time period for the cash credit limit is over, the limit has to be renewed. Also limit can be enhanced if the business is in expansion mode. The rate of interest on cash credit depends on the market conditions as well as the behaviour of the borrower over the last time period when he/she operated this facility.

Cash Credit also helps in bridging the gap of current assets and current liabilities. Typically  such requirement to bridge the gap is also known as a working capital requirements.

Any business activity is not conducted solely in cash but it also requires credit facilities . This means that every purchase or sale does not result in immediate payment, rather in most cases the cash will come after some point of time. Sales on credit will result in debtors while other receivables will give rise to an asset that will be received in the future. Similarly, when a purchase is made there will be creditors, and there might be some payments that a business has to make which will result in an outstanding. This along with the amount locked in stock and raw materials will make up the working capital requirement for a business.

There is a specific amount that will be locked up in stock and raw materials till the time the entire cycle is set wherein the various payments start coming in, and on the other side, the payments required to be made are also done. This amount varies across businesses, resulting in different working capital requirements.

Overdraft

Many  a time it is not possible to raise loans  during an emergency for funds in business. Under such circumstances the investments in the form of Fixed Deposits, Govt of India Bonds, Debt funds  can help in rasing funds without much difficulty. Here, an investor can earn returns on his/her investment just like a normal investment and at the same time use this investment as a means to raise funds that can be used for the business.

An overdraft facility calls for using some investment of the borrower as a security and then providing a facility to borrow against this amount. There is a specific amount that is allowed as the borrowing. The security earns the normal rate of return for the investor and at the same time provides additional finance facility. The good part of the entire exercise is that the borrowers will pay interest only for the time period for which they have borrowed the amount and that too for the specific amount for which they have overdrawn the account.

Term Loans

Term loans are one of the traditional and most common routes used by entities to raise funds. These funds are then used for the business in various ways. One big area of lending in case of term loans is the loans given to small-scale enterprises and businesses that are typically run by individuals or even firms and companies. Term loans form a significant part of the lending process of an entity and this is the reason why it requires attention.

What distinguishes term loans from other borrowings is its tenure. Various other loan options available are short term where the time period is usually around a year and has to be renewed thereafter. But term loans have slightly longer time period .

Most banks in the country provide term loans, so it is not difficult to obtain this type of loan. The conditions and other factors related to the loan will change and there might be some specific sub-category under which the loan will be given by a specific bank, so these factors have to be distinguished while selecting a lending bank or institution. Having a good relationship with the bank will help a borrower while taking this loan, so one should approach a bank with which he/she shares a high comfort level.

There are various purposes for which a bank will provide a term loan. There is a list of reasons why this is done and the borrower has to ensure that the reason that they seek a loan for is one of it. Some of the common reasons listed by the banks include:

  • To setup plant & machinery
  • To reduce high cost of borrowings
  • To build assets for a business
  • To help grow a business through strategic investments
  • To strengthen the asset base

A borrower has to provide the necessary details and documents in support of the claim and then he/she will become eligible for the term loan

Loan against property eligibility

  • Salaried individuals
  • Self employed professionals/businessmen

You can include your spouse/parents/children as co-applicant if you require higher eligibility.

The amount of Loan sanctioned depends on various factors. Basically it depends on the Income and Loan obligations of the applicant and coapplicant. It will be normally 48 to 60 times of net salary and for selfemployed 4 to 5 times of annual income.

Documentation :

The common list of documents for both Salaried and Self Employed applicants are as follows:

1.  Photograph

2.  Identity proof

3.  Address proof

4.  Income proof

5.  Bank Statements

6.  Continuity Proof

7.  Qualification proof( applicable only for Self Employed Professionals)

Income proof of salaried employees are payslips and bank statements

For self employed applicants, the following documents are required

  • Income tax returns along with all supportings including audit reports for the past 3 years..
  • Last 12 months’ bank statements of main business banking.

In addition, there are some other common documents related to the property that are also required to be produced.

  • Original title deeds of the property that is being offered as collateral to loan.
  • Property tax receipt.
  • NOC from society to create mortgage of the property


1. Who can avail a Loan against Property ?
LAP loan can be availed by Salaried employees , Professionals  Self-employed business class and also those who are getting stable source of income like rental income etc. There is a minimum amount of salary that has to be earned by those who are employed and also a minimum limit of annual income earned by the professionals and other self-employed people. This condition is there to ensure that the people who can afford to repay the loans against property can only make use of the facility.
2. What is the difference between a Home loan and LAP?
Home loan is basically to acquire a home . Here the ownership comes to the borrower only with the purpose of acquiring a home. Loan against property  is given to those who owns a property which is mortgagable. Tax benefits are being given  to home loan borrowers, whereas in LAP, this  benefit is not available.
LAP loans are priced higher when compared  to a home loan
3. Can I use LAP for any personal purpose?
Yes, LAP loan is an any purpose loan which you can use for any of your personal needs or business needs. It typically acts like a Personal Loan , with the difference that security need to be provided.
4. Can I close other loans with LAP?
Yes, LAP is a perfect product to consolidate all your loans which are running at higher costs. Moreover interest rate charged on LAP is relatively low when compared to unsecured loans.
5. How much loan I can get on my property?
Loan amount depends on the valuation of your property and also the use of property. Typically if the property is used for commercial purpose, loan is restricted to 50% of the market value of the property and for residential property, this may go upto 60-70% also. However it is at the discretion of the bank to sanction the loan amount , depending on the repayment capacity of the borrower.
6. Can I get an overdraft / cash credit against my property?
Yes, you can get overdraft against your property. Most of the banks offer this product under LAP head. The advantage with this product variant is interest would get charged only on the utlilised amount.
7. Can I get LAP against my property which has been leased out? 
Yes, you can get a LAP loan on your leased out property. In fact if the lessee is a known corporate , then this is a perfect product to unlock value of your property. You can raise loan on the property and the monthly EMI shall be taken care of the rental income, thereby not putting pressure on your pockets. Such type of loan is also called Lease Rental Discounting (LRD). Most people use this product to  add  more property to their asset base.
8. Can I get tax rebates for LAP loan?
No, you cannot get tax relief under LAP Loan. However you can post the entire interest during the financial year  to your profit & loss account  as expenses.
9. Will the EMI amount or the tenure of the loan changes during the loan period?
Yes, the EMI amount or the tenure of the loan could get changed if one has availed a floating rate of interest.
10. Do I need to get  property insurance while availing a LAP loan?
No, it is not mandatory to buy property insurance when you are availing a LAP loan.  But it is in the interest of the borrower to insure property as it  eliminate risk of loss of property

11. Can I sell the property  even when the  loan is not paid off?
Yes, you can sell the property  even when the loan is active. However you  need to inform the lender and get  a consent  from them to sell. The title deeds shall be released to the borrower once all the dues to the bank are fully paid off.
12. I have a plot. Can I get a LAP loan against it?
No, most private banks in India do not give a loan on  plot. However if there is a structure on the plot used either for residential or commercial use, then banks after doing the due diligence   and upon satisfactory checks , they might sanction a loan. However nationalized banks consider plots to give loan against property.
13. Can I get a loan against my industrial shed?
Loan against property is usually given for residential and commercial property and that too for RCC structures. A few nationalized banks and private banks do consider industrial property as an additional security to enhance the limits to business. However it is purely at the discretion of the lender to sanction a loan against such properties.

The following is the grid which includes all major banks and non banking financial institutions.

Rate of Interest

12.75% – 16.00% floating

Processing fees

1.00% – 1.50% + service tax

Pre Closure charges

0% – 2%

Tenure

1 year – 15 years

* No guarantor required

* Some Banks will also provide attractive fixed rates for a few years.

* Loan amount depends on the value of the property, normally 60% of the property value is given in case of residential and 50% in case of commercial.