Loan options for property owners

Property, like gold, is a traditional asset that gives one comfort to the owner — one that you can pledge and get a loan, when there is a need. Lenders offer different loan products with a property as a collateral. Typically, compared to collateral-free loans such as personal loans, these are offered at lower interest rates. For example, the floating reference rate for loans to salaried individuals is 12.9 per cent, from Bajaj Finserv. Loan against property to the same group is in the range of 10.1 to 11.5 per cent.

What properties can be used for getting a loan against property (LAP)?

LAP can be availed against residential and commercial properties. The property must be a completed one; LAP is not available for under-construction property. You can however, get a loan against a plot of land. The age of the property may also be a consideration — LIC Housing Finance requires that the age of the residential property should not be more than 35 years. There must also be no other outstanding loans on the property.

What are the loan terms to pay attention to?

One key term is the interest rate on the loan. This can vary based on the type of property (residential or commercial). Rates for residential properties are slightly lower than that for commercial properties. Loans against plot of land and other special property could have higher interest rates — PNB offers rates starting at 10.75 per cent for these versus 10.25 per cent for residential property.

Rates vary based on the type of borrower (salaried or running a business). SBI, for example, has a 0.5 per cent lower interest rate for salaried employees versus business owners. Rates may also vary based on the loan amount — higher borrowing may be at higher rate. There are also differences in loan tenure, which may depend on the amount borrowed. These loans are typically long-term in tenure — in the case of LIC, the maximum is 15 years.

Typically, the maximum loan amount you can get is about 60-70 per cent of the property value. It may be lower based on other factors. For example, there may be caps on the total loan given, irrespective of the property value. SBI has a cap of ₹7.5 crore for properties in large metros and a lower cap for other locations. With Bajaj Finserv, the maximum loan amount is ₹3.5 crore for business owners, but ₹1 crore for salaried applicants.

There are upfront fees such as for processing. This is about 1 per cent with lenders such as LIC and HDFC. You must also look at prepayment penalties, costs for stamp duties and additional expenses for document handling.

What may be some restrictions to getting the loan?

The age of the borrower may be a factor to consider. Bajaj Finserv limits LAP to salaried employees in the age range of 33 and 58 years. In the case of PNB, the borrower’s age should not be over 60 years for salaried employees (and 65 years for self-employed), at the time of loan maturity.

Your residential status may be a factor as well. For instance, LAP from lenders such as LIC and HDFC, is available only to Indian residents. SBI’s loans are open to NRIs also.

Is LAP a better option than top-up home loan?

No, the terms for LAP are less attractive than a top-up loan you can get on your existing home mortgage. For example, the interest rates for top-up loans are closer to existing home-loan rates, which are usually attractive. However, the advantage of LAP is the higher amount of loan you can get. For example, with HDFC Bank, the maximum outstanding loans plus the top-up cannot exceed 80 per cent of the property value (for loans up to ₹75 lakh).

What can I use the borrowed money for?

Unlike a home loan, there are typically no major restrictions on what the loan amount can be used towards. You can use it for any personal or business expenses.

How does LAP compare with other property related loans?

LAP compares favourably against other options such as loan against rent receivables (LARR) and overdraft against property. For properties that have rental income, LARR may be an option, but the interest rates may be higher, and tenures may be lower (based on the lease tenure). The interest rate for overdraft against property may be higher, for example, HDFC offers an overdraft against property at 9.75 to 10.85 per cent rate versus LAP at 9.25 to 10.35 per cent. The advantage of overdraft is that you need not borrow the entire amount but only what is to be used.

Age matters

The age of the property and that of the borrower are considerations in loan approval

Lap it up

For any property

Long tenures

Flexible usage

(The author is an independent financial consultant)