LAP (Loan Against Property) has gained tremendous popularity due to its secure nature and lack of usage restrictions. It is a secured loan that uses your owned property as collateral and is a smart option for funding large expenses.
With lower interest rates and longer repayment periods, LAP loan offers a convenient way to access funds. It allows you to leverage the value of your property without giving up its occupancy. No wonder LAP outperforms other loan types with lower interest rates and higher loan amounts.
If you are considering applying for a LAP (Loan Against Property), it is essential to consider the following factors that hold significant importance carefully.
Property Appraisal and Valuation
The loan amount sanctioned for a LAP depends on the valuation of your property conducted by the lending institution. This process involves assessing the current market value of the pledged collateral through property appraisal. If all goes well, typically, the amount sanctioned will be 50%-70% of the appraised market value, also known as the Loan-to-value (LTV) ratio.
Mortgage Interest Rates
LAPs offer lower interest rates since they are secured loans. The rate depends on the loan security, margin amount, borrower’s income, credit history, and lender policies. Floating interest rates are usually preferable.
Note: Even a small reduction of 0.25% in your mortgage interest rate can result in significant savings. To secure the best mortgage rates, it is crucial to thoroughly explore your options by extensively shopping around.
Processing Fees
Usually, LAPs have processing fees ranging from 0.5% to 3% of the loan amount. Additional charges include stamp duty, convenience charges, prepayment penalties, and foreclosure fees. Processing times are longer than personal loans due to property scrutiny.
Loan Tenure
Usually, lenders offer LAPs for 5-15 years, extendable up to 20 years if repaid before retirement. Consider balancing the tenure and Equated Monthly Installments (EMI) to minimise interest payments.
Tax Benefits
LAPs generally do not provide tax savings. Salaried individuals may qualify for interest deductions under section 24(B) of the Income Tax Act for new residential house construction.
Note: It is crucial to understand that if you choose to utilise the funds from a loan against property for renovating or upgrading the mortgaged property or for any personal expenses unrelated to purchasing a residential property, you will forfeit your eligibility for tax benefits under Section 24(b).
Lender’s Eligibility Criteria Requirements
Different lenders have their eligibility criteria. Exploring options and minimising the chances of loan rejection is crucial, which can negatively impact credit reports. Choose a lender that offers excellent post-disbursal services.
CIBIL Score
Despite LAPs being approved based on property pledged as collateral, a good credit score (usually above 750) is still important. It helps secure a LAP at lower interest rates and negotiate favourable terms. Timely EMI payments and limited credit utilisation improve credit scores.
Conclusion
LAPs offer several advantages but require careful consideration. Property valuation, mortgage interest rates, processing fees, loan tenure, eligibility criteria, tax benefits, and credit scores play crucial roles. Thorough research is, therefore, necessary to align LAP options with long-term financial interests.