Summary of this article
A loan against property (LAP) can be a smart way to unlock the financial potential of your real estate without selling it. Yet, several myths often discourage borrowers. Understanding the truth behind these misconceptions can help you make informed decisions and leverage your property’s value more effectively.
Monetary requirements can arise anytime, whether for fulfilling your child's higher education expenses, expanding your business, or handling a medical emergency involving a large sum of money. However, placing your property as collateral with the lender can bail you out of such scenarios.
With interest rates usually starting as low as 9 per cent per annum and the tenure going as high as 20 years, a loan against property (LAP) can prove to be a good option for funding even the relatively larger monetary requirements that can arise for personal or business needs.
However, before proceeding with a loan against property, it is advisable to dispel the associated myths.
Myth 1: Pledged property is possessed by the lender and cannot be used by the borrower
The truth is the opposite, i.e., simply pledging your property to avail a loan against it does not put any constraints on its usage. As the 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, however, lenders have the right to recover their outstanding dues by auctioning your property, in case you default.
Myth 2: LTV ratio can go up to 100 per cent
The loan-to-value (LTV) ratio represents the portion of a property's value that a lender is willing to finance through a loan. When applying for a loan against a piece of property, many borrowers mistakenly assume they can receive a loan amount equal to 100 per cent of the property's market value. However, their assumption is not true. Although the maximum loan amount would depend on the valuation of the mortgaged property, lenders usually provide loan up to 75 per cent of the property’s market value. The evaluation process also takes into account factors like the property's location, age, infrastructure, and geographical stability. Loan disbursal time may usually range anywhere between one week and three weeks.
Myth 3: Only residential property can be pledged for availing a loan
Another common myth that surrounds a loan against property is that only residential property can be pledged as collateral. This is not true. Lenders usually allow not only residential but commercial property, industrial property, and plots as well for availing a loan.
Myth 4: The loan amount is determined by the property's purchase price
Contrary to the myth that lenders calculate the loan amount based on the price at which it was purchased, it’s actually determined by the current market value. When assessing a property's market value, lenders consider factors such as its location, age, infrastructure, and geographical stability.
Post evaluation, the loan amount is finalized after factoring in the borrower’s repayment capacity, credit score, fixed obligation to income ratio, etc.
Myth 5: Limitations on the final use of funds
Just like other borrowing options such as a personal loan, top-up home loan and gold loan, a loan against property does not restrict usage of loan proceeds, except for illegal or speculative purposes. Borrowers can use the loan proceeds for various purposes, such as business expansion, a child’s higher education, working capital needs, etc.
Myth 6: LAP typically has a shorter repayment period
Contrary to this myth, a loan against property involves a longer tenure, which may go as high as 20 years, whereas other loan options such as a personal loan, gold loan, or top-up home loan usually involve relatively shorter tenures.
