Can a Loan Against Property be Converted into a Home Loan?
A Home Loan is already a Type of Loan Against Property. The only difference is that the property in question does not belong to the applicant when he or she applies for the loan. There are several reasons why customers look for options to convert an existing loan. For instance, the EMI that they are shelling out may not be fitting their budget anymore or they may find another loan scheme more affordable.
Before we look into the options to convert a Loan Against Property into a Home Loan, let us understand the basic difference between the two types of loan products.
What is a Loan Against Property?
Any Loan Against Property, for instance a DHFL Loan Against Property is available to those who own a property that can be provided as a security against the loan. This is one of the fastest and easiest ways to get a large loan amount in a short period of time. When an individual gets a Loan Against Property, there is no limitation on what purpose the loan can be used for. It can be used for further education, to clear any existing debts, for domestic functions or even to invest in a business that one wants to start or expand. These loans can even be used to purchase a new home or property.
It is possible to get a loan against an existing commercial or residential property or even a plot of land. The amount provided depends upon the value of the property. There is a cap on the amount that one can be availed against the property value. For instance with Citibank Loan Against Property, customers can get loans up to 70% of the property value or up to Rs.5 Crores, whichever amount is lesser.
What is a Home Loan?
A Home Loan however is a type of mortgage loan or loan against property. The difference here is that the loan is provided to avail the property that is mortgaged until the loan amount is repaid in full. With a Home Loan, there is a limitation on what the loan amount can be used for. This loan is only provided when an individual wants to purchase a new residential property, construct a residential property or buy a piece of land for building a home. In comparison to a Loan Against Property, the loan amount offered is higher. Customers can get up to 90% of the property value as the loan amount.
The repayment tenure for a Home Loan is also higher and can go up to 30 years in comparison to loans like DHFL Loan Against Property which is available for a maximum tenure of 15 years.
Can Loan Against Property Be Converted Into a Home Loan?
There are several reasons for why a Loan Against Property doesn’t not appear as economical as a Home Loan. To begin with, the interest rate for a Home Loan is much lesser than a LAP. There are various reasons for this:
A Home Loan is provided to purchase a new home and therefore also fulfills the ‘Housing For All Policy’ extended by the government.
Loan Against Property is provided when individuals are in dire need of financial assistance. This is why it is normally assumed that the borrower will be willing to pay a higher rate of interest.
The risk for the bank is higher with a Loan Against Property. In case of Home Loans, the loan is meant for a property that the person is yet to purchase. So, he or she is likely to be more careful about repayments. On the other hand, with a Loan Against Property, any repayment issues also make it harder for the bank or the lender to exit. While the customer may be willing to risk the property, it is much harder for the bank to make a sale and recover from the property.
Home Loans up to Rs.35 Lakh come under the purview of the PSL or Priority Sector Lending while the Loan Against Property does not have any such provision.
Besides this, a Home Loan has a longer repayment tenure making the EMI more affordable as well. In addition to this, customers can avail tax benefits that are not available with a Loan Against Property.
However, it is not possible to convert an existing Loan Against Property into a Home Loan. This is because the purpose, the nature and the conditions of both the loans are entirely different. It may seem like these two types of loans are the same as they both require the customer to pledge a property. However, conversion is not possible because they are extremely different from one another as we have already discussed above.
However, if customers are unable to manage a large EMI that is to be shelled out against the LAP, there are certain options available to reduce the burden. The best option is to transfer the balance of the existing loan amount into a bank that is offering a better rate of interest or a longer repayment tenure.
With a balance transfer, it is thus possible to transfer the outstanding loan from one financial institution to another. Some banks however require customers to have a minimum balance outstanding in order to make the transfer. The repayment record for the existing loan should also be clean. Usually, the borrower should have made at least the last 12 repayments on time. The new bank or financial institution may also require the customer to have a Credit Card or an additional loan in good standing at the time of application.
Once these eligibility criteria are fulfilled, it is possible to transfer the Loan Against Property to get better features such as the provision of Top Up Loans etc.
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