5 things to know before applying for loan against property

A loan against property is a secured loan, meaning your property is pledged as collateral. Atul Monga, CEO and Co-Founder, Basic Home Loan, says, "This arrangement offers lenders security, typically resulting in lower interest rates compared to unsecured loans. However, the risk for borrowers is significant—failure to repay can lead to the loss of your property." Carefully assess your ability to meet repayment obligations to avoid jeopardising your home or commercial property.

Property valuation is the core metric among lenders and represents the percentage of property value covered by a loan. The loan amount may change due to various factors such as economic conditions, interest rates, and local trends in the market that can either increase or decrease property prices. 
For example, negative equity occurs when there is a huge drop in the value of a property, and thus a borrower can find themself owing more than the property’s current value. 

It's essential to have a clear and justified purpose for taking a LAP. "Whether it's for business expansion, purchasing a new asset, or managing personal expenses, ensure the loan aligns with your financial goals and long-term plans. Evaluate the benefits against the risks, and consider whether the loan will positively impact your financial situation." If repayment seems uncertain, one can explore alternative financing options like unsecured loans.

There are numerous associated charges associated with secured loans, which a borrower must be aware of, says Monga. He says, "This can include processing fees for handling the loan application, valuation fees for assessing the property's worth, and legal expenses for documentation and verification. Additional costs might include government-imposed stamp duty on legal documents, registration fees for recording the property and mortgage, and property insurance, which may be required in some cases."

Income, debt-to-income (DTI) ratio, spending habits, and preparation for emergencies are other major factors in determining repayment ability. The debt-to-Income ratio measures the gap between monthly income and total debt payments, with a low ratio being desirable. Other expenses to consider include repayments on other loans, living costs, and any other financial commitments a business entrepreneur may have. It’s crucial to plan for emergencies, as unexpected expenses can derail repayment; therefore, having a contingency plan is essential.

Opting for a loan against property (LAP) can be a viable financial solution when you need substantial funding. However, it is crucial to carefully consider the benefits and drawbacks before making this financial decision. Evaluate factors such as property valuation, risk assessment, loan-to-value ratio, interest rates, additional charges, and legal issues. Being well-informed about these aspects will help you make an educated choice and navigate the LAP loan process with confidence.