Make an Idle Property Work During a Financial Crunch
In India, we refer to Loan Against Property as a Mortgage Loan. If you have a property in your name and you are in need of funds to cater to your urgent financial needs, you can Apply for Loan Against Property. This is the best way to utilise your idle property and make it work during a financial crunch.
Most banks offer LTV (Loan-to-Value) of 50-90% of the mortgaged property’s market value. You can avail a loan of up to 50 Crores (depending on the value of your property). You can use this amount to fund any personal need including wedding, education, medical emergencies, business growth, and so forth.
Being secured in nature, Loan against Property is the best funding alternative available to you. Unlike unsecured financing, this loan comes at low-interest rate, making it more affordable.
To avail this form of a loan, firstly you need to match the eligibility criteria of the lender.
Loan Against Property Eligibility
There are 3 factors that determine eligibility for a Loan Against Property.
- Income generating capacity of the borrower
- Value of the property
- Repaying capacity of the borrower
- The first thing every banker takes cognizance of is the title of the property. There should not be any encumbrance on that property. The encumbrance certificate obtained from the Sub-Registrar Office will establish this fact. The bank has legal experts to determine the title of the property. They do a legal scrutiny and establish the chain of ownership for around 30 years.
- The bank does the job of evaluating the house. This is very important because most banks stipulate a 50% margin whenever they sanction a Loan Against Property. This entails that the value of the house should be 200% of the eligible loan amount.
- Income tax returns, Form 16, and salary slips to determine income is also required. The bank will also ask for documents like bank statements where the salary is credited to ensure that he does not have other liabilities. Typically, banks offer a loan amount of up to 36 times of borrowers’ monthly salary in case they are employed by a Government or PSU. In case a borrower is a self-employed person, they calculate the eligibility as three times the average income (of the last three years) reported in the IT returns.
- The credit report is the next item on the agenda to verify the creditworthiness of the borrower. Since this is a Loan Against Property which is a secured loan, banks sanction loans if they have a credit score in the range of 600 to 650. It is only when you apply for Credit Cards and Personal Loans that the banks look for a credit score of over 750.
- The repaying capacity comes next on the eligibility criteria list. Banks need to ensure that the borrower has at least 50% of his monthly income as take-home pay after catering to all loan instalments including the prospective Loan Against Property. In case he has a Housing Loan, some banks go to even 40% as take-home salary depending on the creditworthiness of the borrower. This gives them the maximum EMI they can deduct from his account.
The maximum eligibility is the minimum of the following three factors.
- 50% of the value of the property
- 36 times the monthly income of the borrower
- The maximum EMI they can deduct thereby ensuring take-home pay norms
Is a Loan Against Property a better option than a Personal Loan?
- You need a credit score or over 750 for a personal loan
- The maximum repayment period for a Personal Loan will be around 60 months
- The maximum amount you get might be equal to 60 times your monthly income.
- The EMI would be more than you would be paying in case of a Loan Against Property. This can reduce your eligibility because the 50% cap will be applicable in every case.
- Banks take a longer time to sanction Personal Loans because of their unsecured nature.
- The rate of interest in a personal loan would be in the range of MCLR (marginal cost of funds based lending rate) plus 3% whereas in the case of a Loan Against Property would attract a rate of interest in the range of MCLR plus 1.5%.
Loan Against Property vs. Personal Loan
Loan Against Property as this ensures that the idle asset is being used in an optimum manner. Make your asset work for you.
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