Different Types of Loan Against Property

Securing a loan against property (LAP) has become an increasingly popular financing option for individuals and businesses alike. This type of loan involves borrowing against the value of a property you own, which serves as collateral for the loan. It’s a secured loan and thus generally offers lower interest rates compared to unsecured loans. Loan against property can be used for various purposes, such as funding education, business expansion, medical emergencies, or even buying another property. Let’s explore the different types of loans against property that are available in the market.

Home Equity Loans

A home equity loan, also known as a term loan, is a conventional loan against property where the amount is given to the borrower in a lump sum. This type of loan is generally offered for a fixed rate of interest and tenure, which means the borrower will have predictable monthly payments. The loan amount typically depends on the difference between the current market value of the house and the outstanding mortgage amount, commonly referred to as equity.

Home Equity Line of Credit (HELOC)

A home equity line of credit is a type of revolving credit secured by the equity in the borrower’s home. Unlike a standard term loan, a HELOC operates much like a credit card, wherein you have a certain limit and can withdraw funds as needed during the ‘draw period’. You will only pay interest on the amount that you’ve actually borrowed. Once the draw period is over, you will start paying back the principal amount as well. HELOCs usually come with variable interest rates.

Interest-Only Loans Interest-only loans require the borrower to pay only the interest on the principal balance, with principal payments postponed until a specified period. This type of loan can be beneficial for individuals who anticipate a significant rise in income in the future, or for those who plan to resell the borrowed-against property at a profit in a short period. Borrowers should exercise caution with interest-only loans, as there is a risk of housing market downturns or personal financial stability affecting their ability to repay.

Overdraft Facility

An overdraft facility against property is a flexible financing option where the loan is granted as an overdraft limit instead of a lump sum. Borrowers can utilize funds up to the sanctioned limit and pay interest only on the used amount. This is ideal for those who require funds on a rotational basis for business or personal use. It’s important to note that overdrafts often come with a higher interest rate compared to term loans, given their flexibility and revolving nature.

Reverse Mortgage

A reverse mortgage is designed for seniors, typically above 60 years of age, who own a property. This loan allows them to convert a part of their home equity into cash without having to sell the house. The unique aspect of the reverse mortgage is that the borrower does not have to make any loan payments; instead, the loan is repaid when the borrower dies or decides to sell the house. The loan amount depends on the value of the property and the age of the borrower.

Loans for Commercial Property

If you own a commercial property, you can take a loan against it similar to a residential property. These loans can be used to fund business operations, acquire new machinery, or expand the business. The terms and interest rates for commercial property loans are usually dictated by the nature and value of the property, as well as the creditworthiness of the borrower.

Lease Rental Discounting

Lease rental discounting (LRD) is another type of loan against property where the loan is sanctioned against the rental receipts derived from lease contracts with corporate tenants. The loan amount is based on the discounted value of the rentals and the underlying property value. It is an excellent way for property owners to harness the value of their leased out asset.

Advantages and Disadvantages of Loan Against Property Advantages

● Lower interest rates compared to unsecured loans, as the loan is backed by property.
● Longer tenure option, which can lead to lower EMIs.
● Large loan amounts can be borrowed based on property value.
● Flexible end-use, meaning the borrowed amount can be used for various purposes. Disadvantages:
● Risk of losing the property if you fail to repay the loan.
● The process of applying for a loan against property can be lengthy and include a
thorough due diligence process.
● There may be restrictions on the loan-to-value (LTV) ratio, which can limit the amount
you can borrow against your property.
Who is Eligible for a Loan Against Property?
Eligibility criteria for a loan against property may vary across different financial institutions but typically include:
● Ownership of a residential or commercial property.
● A stable source of income — the borrower can be a salaried employee, a self-employed
professional, or a businessman.
● Good credit score and credit history.
● Age criteria (usually above 21 years at the time of applying and not more than 60-70
years at the time of loan maturity).

Conclusion

A loan against property can be a financially prudent way to access funds at lower interest rates. Whether dealing with short-term cash flow issues, investing in business growth, or managing personal expenses, leveraging your property’s equity with a LAP offers both opportunities and risks. It’s critical to understand the differences among the various types of loans against property, their advantages and disadvantages, eligibility criteria, and optimal use-case scenarios. Always exercise due diligence and consult with financial advisors to tailor the best financial product for your needs. Remember, the property you offer as collateral is at stake, so make informed repayment plans to avoid fiscal distress.