15th June 2019.
Loan against Property – Some tips !
When people need large sum of money for business, marriage or medical expenses or any other contingency, they tend to sell the property to meet the fund requirements which also results in loss of ownership of the asset and it will be difficult to buy back the asset again as costs would escalate. Instead people should be advised to mortgage the property- residential or commercial-and avail loan against the fixed asset instead of selling it. By doing so the amount needed would be secured and the ownership remains. Banks are looking for good borrowers with security to lend as this would be a safe loan for Banks. While taking a loan against properties (LAP) the following vital factors may be kept in mind.
- While giving loans against properties, banks allow the loan to be repaid over a long period of time unlike other loans like personal loans, car loans, educational loans etc. So avail the long term and pay small amounts as EMI for a period over 10 years. While availing the loan insist of a variable EMI option providing for more remittance in case of surplus income without any prepayment penalty charges.
- While LAP is being considered Bank will go in for valuation by an approved value and three types of valuation figures will be given- Current market value, guideline value, distress sale value and bank will opt for the lowest and apply a margin of 20- 30 % and sanction the loan. The title deeds will also be scrutinized by Bank’s approved Lawyer for its encumbrance if any, minor’s ownership, whether clear and marketable etc., The cash flows, credit scores and repayment capacity are the prime factors. The loans may be taken in joint names if one of them is aged and no regular income. While availing the LAP one has to thoroughly understand the terms and conditions such as period, rate of interest, penalty charges etc. and the document clauses. Procession fees and document charges should also be checked.
- Rate of interest is a key factor which is normally lower than other loans and starts at even 9 % in some cases. The periodicity of payment of interest has to be checked as otherwise it would lead to compound interest. At least interest may be paid if there is a moratorium permitted by bank is some extreme cases. One has to be clear if the rate of interest is fixed or floating.
- Normally banks do not check or verify the end-use of funds in LAP unlike other cases like education loan, personal loan, housing loan etc., The loan amount has to be the minimum amount as it involves interests and should be utilized for a specific purpose and not for speculative or illegal purposes. May be used for marriage expenses, education, medical treatment, business expansion etc.,
- The LAP may also lead to some tax benefits. Depends on the end-use of funds. U/S 37 (1) of the Income Tax Act, the interest paid and associated costs such as document charges, processing fees can be claimed as business expenditure. If the money is used for purchasing another house property interest repaid can be claimed u/s 24 (b) up to Rs 2 Lakhs in a financial year but proof for such a claim be established. Unlike home loans one cannot claim any tax benefit on principal repayment of LAP.
So be smart and prudent before taking LAP. Call Goodwill for any assistance.