In India, it is quite common to pledge an asset as security and borrow a loan against that. Residential property is one of the most common assets pledged as security. Loan against residential property is a common mode of finance. It is a form of secured loan wherein the property is pledged as security with the financial institution and a loan amount (depending on the value of the property is borrowed). The property papers are with the lender until the loan is paid off in full. In case of default, the lender seizes the property and uses it to recover the loan amount. However, there are common misconceptions prevailing in the society regarding loan against property. This article attempts to clear the misconceptions.
Loan amount is equivalent to the value of the property – Many people believe that when you pledge your property as security to borrow a loan against it, the loan amount granted will be equivalent to the value of the property. This is not true at all. Although it differs from lender to lender, but you are generally granted a loan amount around 40-60% of the value of the property. The value of the property isn’t as claimed by the borrower. The lending institution sends its officials to do a valuation of the property and then the accordingly the loan amount is decided, depending upon the terms of the bank.
Loan is only granted on property that is fully constructed and ready for occupation – This is again not true. Loan can be granted on under construction property or a plot of land either as long as the property or the land is free from any litigation and does not have an existing mortgage. The nature of the property, however, can affect the loan amount granted and the interest rates. Under construction properties have a higher risk associated with them. Therefore, lenders might charge higher rates of interest as a measure to safeguard their own interests.
You cannot use the property that you pledge as collateral – This again is not true. One can pledge his own house that he is living in as security. However, in that case if the borrower defaults and in the event that the bank seizes the property, the property will have to be vacated.
The rate of interest is high – This isn’t entirely true because loan against residential property is a secured loan in nature and since banks have an asset in terms of security that it can use to recover the loan amount, the level of risk is lower than personal loans borrowed without any security. Therefore, the rate of interest will be lower. However, the interest rate here to a great extent depends on other factors like age of the property, location, whether it’s under construction or ready to move in etc. A new property in the heart of town will command a high price in the market, therefore, the rate of interest will be lower. Similarly, an old ancestral property in the suburbs will command a lower price and, therefore, a higher rate of interest might be charged.
That being said, loan against residential property is an excellent financial solution if you need a huge amount of money. The money can be used for various purposes like daughter’s wedding, children’s higher education, medical treatment of a loved one, etc. It is a long term loan, which if planned well can easily be repaid without any risk to the property.
Related post-
Avail of a Loan Against Property Today - Click here
