Loan Against Property: What You Need To Know

Time to read: 7 mins | March 13, 2018

Niraj and Amruta have been living in their garden-facing two-bedroom apartment for over a decade. Located in a bustling suburb of Mumbai and 11 floors up, it was a dream home for the couple when they first moved in with their one-year-old daughter.

A decade and a son later, their dream home turned cluttered. The scribbles on the walls were an eyesore and the furniture was old and stained. Their once stylish dream home looked dull and boring. Now that the kids were grown, they could safely renovate and remodel their home.

The estimated cost of renovation came as a shocker to the couple. The contractor gave them an estimate of Rs 10 lakhs. Remodels and renovations can be extremely expensive, they realised.

The couple had savings and investments, but these were already set aside towards planned financial goals such as their children’s education and retirement.

They were weighing the different options to fund the costs. They did not want to break their investments, so a loan was the only option.

A loan on credit cards or even a personal loan were restricted to loan amount limits and are riddled with high interest costs. That is when a family friend suggested converting the equity in their home to cash. In other words, they can use their 2-BHK flat as a security and avail of a loan against property.

This was something new for the couple, who have been working in the technology sector for a decade and a half. So they decided to explore further and this is what they found out.

What is a loan against property?

A loan against property or a mortgage loan is a sensible solution for real estate owners who wish to fund some of their expenditures with a bank’s help. However, unlike in the case secured loans such as home loans, car loans or two-wheeler loans, you can use the loan against property for any purpose, just as in a personal loan.

A loan against property is similar to a home loan, where the property is used as collateral for both loans. They differ in terms of end use. While a home loan is designed for buying a home, the options for using a loan against property are broader.

In the case of a loan against property, the borrower has many options to use the loan funds – no matter whether it is renovating one’s residence, purchasing a commercial property, buying new furniture or household appliances, starting a business, growing an existing business, going on a long trip or making any other dreams come true.

A loan against property makes it possible to get large loans.

The property backs the borrower's commitment to repaying the loan and lowers the risk of loss to the lender.

As an unspoken rule, interest rates on collateral loans such as loan against property are significantly lower than unsecured loans like personal loan.When you use collateral or security such as a property to back up the loan, you may be able to borrow larger amounts of money at lower interest rates. This can save you thousands of rupees over the years.

When you pledge your property, the bank or lender takes less risk, which means you are more likely to get a good interest rate. However, other factors like credit score, regular income, and job stability may also influence your loan approval chances and interest rate.

In general, the lender will offer you less than the value of your pledged asset. When applying for a loan, lenders often quote an acceptable loan to value ratio (LTV). For example, if you borrow against your house, lenders might allow an LTV of upto 65%. If your home is worth Rs 1 crore, you can borrow up to Rs 65 lakh.

Types of loan against property

You may find different types of loans against property through a variety of lenders. They can be used for business as well as personal purposes.

Axis Bank offers three different types of loans with your property as a collateral, namely –

• Loan Against Property
• Lease Rental Discounting
• Overdraft facility Against Property

All these jargons were confounding. So the tech-couple delved a bit in each type of credit facility.

Asset Power — Loan Against Property: Axis Bank Loan Against Property can be availed for a self-occupied residence or a commercial property. An Asset Power loan is a simple term loan with your property as your security. At Axis Bank, you can get a Loan Against Property from Rs 5 lakhs to Rs 5 crores. These limits are applicable for the two other product lines with your property as a collateral.

Lease Rental Discounting: Lease Rental Discounting or Loan against Rent Receivables is a term loan offered against rental receipts derived from a leased out commercial property. The loan is provided to the lessor based on the lower discounted value of the future rentals and the underlying property value.

Overdraft facility Against Property: An Axis Bank Loan Against Property can be availed of either as a Term Loan with an EMI repayment option or as a Drop-line Overdraft Facility.

The Loan against Property with overdraft facility is designed to cater to the need of the business community for meeting their short-term working Capital requirements. Overdraft can be in the form of evergreen (fixed) or dropline (reducing).

They also learnt that apart from their features, the product lines differ in terms of the maximum tenure that can be availed. The maximum tenure that can be offered is provided in the table below:

Niraj and Amruta did not own any commercial property and both were salaried employees. Hence, they were best suited for a vanilla loan against property to fund their expenditure. They ran a quick check on the borrowing limits.

Borrowing limits applicable for Axis Bank Loan Against Property

Minimum Limit — Rs 5 lakh

Maximum Limit — Rs. 5 crore (based on Product/Variant categorisation)

Since their property was worth over a few crore of rupees, a loan of Rs 10 lakh was well within limits. However, there are other factors and eligibility norms too that need to be considered before sanctioning the loan.

Factors considered in sanctioning the loan amount

• The property’s registration
• The property’s market value
• Your requirement and eligibility
• Your income and repayment capacity

Individuals who are eligible for a loan against property include:

Salaried individuals – The borrower should be a permanent employee, above the age of 24 years at the time of loan commencement and upto the age of superannuation.

Self-employed individuals – The applicant should be above the age of 24 years at the time of loan disbursement and upto 65 years at the time of maturity. They should be regular with filing their Income Tax Returns.

Self-employed Professionals – Professionals such as, doctors, engineers, dentists, architects, chartered accountants, cost accountants, company secretary, and management consultants can apply. The age criteria is similar to that of self-employed individuals.

The couple met the basic eligibility requirements. Now all that is required is to get their documents in order.

Documents required for Axis Bank Loan Against Property

Proof of identity (any one of the following):

• Voter ID card
• Driving license
• PAN card
• Photo credit card
• Employee ID card (for salaried)
• Defence/Police/Government department ID card (for salaried)

Proof of Residence (any one of the following):

• Bank account statement
• Latest electricity bill
• Latest mobile/telephone bill
• Latest credit card statement
• Other similar instruments indicating the address or existing house lease agreement

Proof of income:

Salaried

• Latest salary slip showing all deductions or Form 16
• Recent salary certificate
• Last 6 months bank statement/pass book where salary or income is credited

Self-employed

• IT Returns of last 2 years
• Computation of income of last 2 years certified by a Chartered Accountant
• Last 6 months bank statement/pass book where salary or income is credited
• Balance Sheet of last 2 years

Guarantor form (Optional)

• Copy of lease agreement for all lease rental discounting cases

Now that they were all set to get a loan approval, Amruta was eager to know the costs in the form of interest rate and processing fees.

Loan against Property Interest Rate

The Axis Bank Loan Against Property interest rate ranges around 11%-12%. As the loan is floating rate, the MCLR reset frequency for loan against property is half yearly.

In case of decrease in MCLR on the reset date, the interest rate on the loan against property will decrease , which in turn will influence the EMI/tenor of the loan. Likewise, in the case where there is an increase in the MCLR.

Other fees and charges

The loan processing charges is 1% or Rs 5,000, whichever is higher. The charges are the same for all variants.

Niraj and Amruta are now satisfied with the costs and the terms and conditions of the loan. The EMI was affordable and they went ahead with disbursal of the loan against property. The documentation was minimal and disbursal was quick.

Now Niraj and his family are well on the track to convert their apartment into a place they had always dreamed of.

Loans can certainly help in fulfilling your needs and make long overdue plans a reality. Along with this, you need to ensure you have adequate finances and do not run up a debt beyond what is required and manageable. This will help you maintain a healthy credit score.

Apply now for a Loan against Property from Axis Bank!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.