Loan Against Property

Trainings by Vidya Bhagwat

Agenda

• Introduction• Amounts of loan• Categories of borrowers• Documents required• Purpose of Loan• Loan structuring• Nature of borrowing• Disadvantages of a loan against property

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Introduction

• The term ‘loan against property’ refers to a situation in which the borrower takes a loan from a bank or financial institution where the security for the loan is a property that is owned by the borrower.

• The nature of the property will determine the amount of the loan that is possible and the extent of the amount of the loan that is actually available at a certain point of time.

• Availing of a loan against property ensures that the necessary borrowing is completed with the security being created and that the funds are available for the necessary use at a low interest rate.

• The interest rate is lower than other loan interest rates because the property element makes it a type of secured loan.

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Amounts of the loan

• Amounts of loan vary with banks or financial institutions. • There can also be further distinctions within a category based

upon the location of the property and the person taking the loan.

• Usually, the minimum amount of the loan against property that is given by various banks start at Rs 1 lakh. When it comes to the maximum amount side, there is a lower maximum limit as far as the rural areas are concerned because the figure here is likely to be restricted in the range of Rs 5 lakh-Rs 10 lakh. On the other hand, the maximum amount figure when it comes to other areas including urban areas is usually pegged at a limit of Rs 100 lakh or Rs 1 crore. Most loans including loans against property will be available within this range.

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Amounts of the loan

• There are also conditions with respect to the repayment of the loan or the period for which the loan will be in existence.

• Most banks also keep an upper ceiling as far as the period for the repayment of the loan is concerned and due to this reason the repayment schedule for the borrower will also be impacted.

• In most cases, the banks will not go beyond 84 equated monthly instalments or a 7-year time period though in reality long-term personal loans in excess of 3-5 years is difficult because banks will not be willing to go this far as far as repayment of the loan is concerned.

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Categories of borrowers

• Personal loans are available for different categories of borrowers who are people in different walks of life. This makes it a route that is quite easy to access and hence also represents a way in which all categories of borrowers can take care of their personal finances. The presence of this route increases the choice for all categories of borrowers and hence this has to be considered. The loan against property is available for– Salaried employees– Professionals– Self-employed people– Other income tax assesses

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Categories of borrowers

• There is a minimum amount of salary that has to be earned by those who are employed and also a minimum limit of annual income earned by the professionals and other self-employed people. This condition is there to ensure that the people who can afford to repay the loans against property can only make use of the facility.

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Documents required

There are several documents that are required to be produced by the borrower for taking a loan against property. These documents are important because they enable the bank to understand the financial position of the borrower and based upon the conditions that are present here the exact amount of the loan will be available.

• For a salaried individual, there are two main documents that are required and which will complete the entire process of the documentation. These are:

• * Latest salary slips to know the current earnings.• * Form 16 for the purpose of knowing the total benefits for

the year.

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Documents required

• When it comes to professionals and self-employed persons, there are a whole lot of documents that will be required to ensure that the loan against property is passed and made available. These include:– Income tax returns for the past 3 years. This kind of long time period documents

are required to check for the consistency and stability of the earnings.– Latest income tax assessment order for specific loans that are slightly larger in

size.– Last 6 months’ bank statements. These have to be from the main bank of the

borrower.• In addition, there are some other common documents related to the property that

are also required to be produced.– Original title deed of the property that is being offered for the loan against

property.– Receipt of the latest taxes that have been paid like municipal tax, water tax and

so on.– Non-encumbrance letter from the society.– Permission to create a mortgage from the society.

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Charges

• Upfront fee

• Processing fee

• Documentation charges

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Purpose of loan

• There is nothing that will stop the individual from using the money for various purposes and this includes:– Children’s education, including higher education– Travel purpose for self and family– Marriage in the family– Emergency for medical purpose– Business need for raising immediate funds. There is no

restriction on using the funds for the purpose of business also like a business loan.

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Loan structuring

Loan structuring

–Term offering

–Overdraft method

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Specific conditions

There are specific conditions that have to be fulfilled by the borrower before the loan against property is actually sanctioned. The conditions for loan are different when it comes to individuals and business enterprises. Hence, there has to be adequate care to fulfil these conditions for loan in order to be able to get the loan against property.

• For individuals

• For business enterprises

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For individuals

• The age of the individual has to be below 60 years.• Minimum monthly net salary or net annual income should be

above a specified limit, usually, Rs. 10,000 and Rs. 1.2 lakh, respectively.

• Net annual income has to be double that of the total of the equated monthly instalments for the year.

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For business enterprises

• Should have developed a strong track record of operations and performance.

• 3 years of cash profits.• Net profits in the immediately preceding financial year.• Minimum net annual income/profit of specific amounts,

usually Rs 1.2 lakh.• Net income/profit to be 1.5 times the value of the total

equated monthly instalments to be paid in the year.

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Nature of borrowing

• Loan against property can be a boon for the people who have an asset with them but do not have the necessary amount of funds that can be used for their specific requirements.

• In such a condition, a loan against property can help them borrow funds and then use this amount for the required purposes. If the individual goes and borrows money from an unsecured source like a personal loan or on a credit card, then the borrowing will be costly for him/her. This is because a low interest rate is not possible in these borrowings that cost much higher than several other options, including loan against property.

• This will push up the cost of the borrowing for the individual and will also restrict the amount that he/she can borrow and it might leave the original objective of getting a loan at low interest rate unachieved.

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Nature of borrowing

• This might also give rise to a position where the borrower comes under a large amount of strain in the process of repaying back the amount that has been borrowed from these sources at an exorbitant rate of interest.

• In case of a loan against property there is an asset available with the individual in the nature of a property which can be put to better use. Instead of borrowing from an unsecured source the individual would do well to take a loan against property.

• This will ensure that the property is taken as a security and then the bank gives a loan against this. The presence of the security will reduce the rate of interest that is charged on the loan and various other conditions will also be less strict, so this will ensure that the borrowing is possible and that too at an affordable rate. This also changes the nature of the borrowing because it is against a secured asset and hence becomes a secured loan.

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Disadvantages of a loan against property

• No scope for mistakes

• Loss of ownership

• Higher amount

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Assignments

1. What are the advantages of taking loan against property?

2. What documents are required by an individual and by a business enterprise to take loan against property?

3. Compare and contrast overdraft method and term offering method. Which one is more beneficial?

4. Compare the charges charged by at least 3 banks for loan against property.

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Thank You