Loan against Property- A Multipurpose Loan
One of the most popular mortgage loans is Loan Against Property or LAP. Loan against property or LAP is a multipurpose loan which may be taken for following purposes like
- Meeting working capital requirement or
- Starting a new business
- Expansion of business
- Funding of education or
- Marriage of children or
- Meeting medical expenses
- Any other purpose provided it is not for speculative transactions
Loan against property or LAP can be of 3 types:
- Loan against residential property or
- Loan against commercial property
- Loan against land
In case of commercial properties on which rental is already coming, a tripartite agreement is entered between landlord, tenant and banker and equitable mortgage on the property is created and lease rental will be assigned.
Who are eligible for Loan Against Property?
Following types of entities are eligible for loan against property or LAP provided they are filing their Income Tax returns and have reasonable income/turnover:
- Startup firms
- Smaller firms and mid-sized businesses
- Partnership firms and Limited Liability Partnership firms
- Professionals who are self employed
- Private limited companies or closely held companies
Loan against property or LAP are normally given for maximum tenure of 15 years. This is the best way to convert any immovable property into cash as per any businessmen’s financial requirement. Property may be in name of self or spouse or children or parents. Normally, there are no prepayment penalties in such type of loans. Loan against property need to be liquidated before the borrower reach an age of 70.
LAP can be taken between Rs 10 lac to 10 crores depending upon financial worthiness of customer and legal and technical valuation of property. Tenure of loan carried between 5 years to 15 years. Processing fees is normally 1% plus GST. Normally, 60 to 65% of market value of property is given as Loan against property.
With Loan against Property, businessmen does not feel burden of working capital since He can leverage the value of a residential or commercial property.
The best part about Loan against property or LAP is that unlike home loan where money is given directly to seller of properties, in this case, the money is given directly to borrower and He may use the funds received for his desired purpose. Thus, there is no end user restrictions in case of LAP. Since, the banker get’s security of fixed or immovable assets, hence the risk of banker is less in such types of loans as in case of default, banker can sell the property and recover it’s dues. Therefore, it is kind of secured loan. Further, since LAP are secured loans, therefore, it’s rate of interest is comparatively less as compared to unsecured loans.
At the time of repayment of LAP, the charge created on such mortgaged property are vacated by the banker and the owner again becomes real owner of such property. Further, on vacation of charge and repayment of original loan, the owner may again mortgage its property in future to get more loans from bank.
Thus, Loan against property is best type of funding for both businessmen as well as banker. Also, it forms part of major revenue source of bankers in India.