Among a host of loan options provided by banks, a relatively popular product is the Loan against property or mortgage. The product clicks with borrowers because it generally allows one to borrow a relatively large sum of money for any need. It generally has easy documentation, speedy approvals and flexible repayment options.
According to the Transfer of Property Act, 1882, a mortgage, which is essentially availing a loan against property is "the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, and existing or future debt or the performance of an engagement which may give rise to a pecuniary liability.
This means one can apply for a loan from a bank by extending the property as a collateral or security. However, as the definition states mortgage only involves "transfer of interest" and the ownership of the property remains with the borrower. Ownership transfers to the bank only in the event of default on the loan.
Loan against property or a mortgage is popular because it has some perceptible benefits. Higher loan amounts are generally available for longer tenure when compared to conventional loans, and at a discounted interest rate. Most banks accept both residential and commercial properties for mortgage.
Its key benefits are:
Good when availing larger amounts
Interest rates are lower
Tenure is longer, which means lower EMI
Good tool for debt consolidation.
Funds can be used for business as well as personal needs.
To fulfill the eligibility criteria banks generally demand proof of residence, proof of identity, latest Bank Statement where you can show a salary / income for the past 6 months, salary slip if employed, and relevant copies related to the concerned property the borrower wants to pledge. If the borrower is self employed, generally the certified financial statement for the last 3 years is needed.
Loan eligibility as usual depends on the borrower's credit rating along with factors like income, age, qualification, number of dependents, spouse's income (if any), assets, liabilities, and continuity of occupation. Once the loan is approved is it either disbursed in full or in installments as instructed by the borrower. The borrower can often choose between fixed and floating rate of interest and generally there is an option for part and prepayment of the loan.
The loan that is extended to the borrower is based on the market price of the property pledged. However, what is important to keep in mind is that a bank always holds bank a certain amount of margin money and they generally extend a maximum of 60 -70 % of the market value of the property. This ensures that the banks are protected against any cyclical fluctuations in the real estate market and a drop in prices.
Who should opt for it?
Mortgage or loan against property is particularly popular when it comes to needing money for your business. While there is no restriction on using it for personal needs, however, if the amount is small, a personal loan can make much more sense.
While people use loan against property for education and even to buy/build a second property, most mortgage loans are taken for business purposes. This is especially helpful if the business is in need of emergency cash at lucrative interest rates.
It is always risky to put your property at stake, especially if it's your house. This form of loan is also not advisable if you are starting up and there is a substantial amount of risk involved in your business. Loan against property should not be used as a form of risk capital, but should be used when the borrower knows he would be able to service the loan or repay it before the stipulated period.
News source: The Hindu