When to make use of loan against property5 min read . Updated: 19 Jul 2015, 11:33 PM IST
It's best used when you need a large lump sum amount, and other sources of money are not available
Lending institutions have seen a steady growth in the loan against property (LAP) segment. This is a secured loan in which you can mortgage your property to the lender and borrow against it. The loan amount will depend on the value of the property, which, in turn, depends on factors such as location, age of the property and quality of construction.
According to a report by Nomura, LAP is set to grow at a faster pace than retail credit growth, and is already 20% of the mortgage business. The LAP segment’s size is Rs2.3 trillion—a 30-35% compounded annual growth rate over the past three-four years, according to rating agency Crisil Ltd. Bankers and non-banking finance companies (NBFCs) expect to see a steady growth in this segment.
For financial institutions, LAP is a big opportunity. “This is a big business and has a potential to grow 30% a year," said Arvind Kapil, senior executive vice-president and business head-unsecured loans, home and mortgage loans, HDFC Bank Ltd. The bank’s LAP book is worth about Rs22,000 crore.
For some companies, the growth in LAP has been as per their overall business strategy. “LAP has always been a part of our overall business strategy and has been growing steadily. We have been growing at 16-20% ever year. Our loan book under management is worth around Rs5,700 crore. Of this, 20-22% is from LAP," said Harshil Mehta, chief executive officer, Dewan Housing Finance Corp. Ltd (DHFL), an NBFC.
In case of Indiabulls Housing Finance Co. Ltd, which has an overall loan book of Rs5,300-5,400 crore, the LAP segment constitutes 20-27%. “We have seen an overall growth of 20% in LAP year-on-year," said Sachin Chaudhary, mortgage business head, Indiabulls Housing Finance.
In case of DCB Bank Ltd, which is more aggressive in this space than other banks, even the bigger ones, 70% of its overall mortgage business comes from LAP. “We see more potential in the segment," said Pravin Kutty, head-retail and small and medium enterprise banking, DCB Bank, adding that this (mortgaging property) is an easy way for those who are self-employed to raise capital for their business needs.
While many take LAP to fund big-ticket expenses such as foreign education or even weddings, most take it to meet business needs. While salaried individuals find it easier to get, say, a personal loan, lenders are not so forthcoming with a self-employed person.
Here’s a look at what banks and NBFCs offer in this segment, and what you should know before taking such a loan.
What’s on offer?
Secured loans are usually cheaper than unsecured loans. Since LAP is a secured loan and banks have collateral in case of default, the interest rate on these loans is lower than, say, a personal loan. Interest rate on LAP is currently 11.5-15% per annum. The tenor can go up to 10-15 years depending on the financial institution. The minimum loan amount can vary, though most offer loans above Rs2 lakh. “The ticket size ranges from Rs15 lakh to Rs6 crore," said Chaudhary.
You can either get the loan amount as a lump sum from the financial institution where you mortgage your house or as an overdraft facility. But before the loan is offered, to check your eligibility, the financial institution will see your repayment capacity and a certain percentage of the market value of your property. “Banks have to be careful on the risk aspect. We check the capability of the customer and guide her correctly. You shouldn’t only fund because the property is at X level. The whole premise is that the customer should service the loan; collateral is just a backup," said Kapil.
Typically, banks and NBFCs give 50-65% of the market value of your property as the loan amount. But some banks lend at higher loan-to-value ratios.
“We lend up to 70% of the value of the property depending on the repaying capacity," said Kutty. To understand the repaying capacity, the lender will look at your income minus other loan repayments.
There is also an age limit to take this loan—60 years, if you are a salaried individual, and 70 years, if you are self-employed.
The processing fee is usually deducted from the loan amount sanctioned to you, and ranges from 0.50% to 3% of the loan amount plus service tax at 14% of the fee amount. Stamp duty and other statutory charges are applicable; these differ from state to state.
What you should do
LAP is an instrument that can come in handy if you are looking for a big amount, say, for business needs. This is also the reason why most NBFCs and banks target their products in this category towards self-employed individuals. “LAP opens the door for self-employed individuals. A bulk of LAPs cater to such customers," said Kapil.
Considering the potential of the segment, lenders are further fine-tuning their offerings. Some are doing that by reducing the turnaround time to get an LAP. “We are working around LAP to reduce the turnaround time substantially. This could be a game-changer. Soon, for existing customers, we are going to use advance analytics so that we can process LAPs faster," said Kapil.
If you, too, need a large amount and are willing to mortgage a property that you own, LAP may be just the solution you are looking for. But before opting for such a loan, assess your repaying capacity. If you default, your credit score will be affected and, of course, you will be liable to pay a penalty.
“Taking an LAP to start a business is not the best thing to do. Instead, take it if you have business expansion needs and know that the margins from the business will be able to offset the interest on LAP," said Rishi Mehra, founder, deal4loans.com, a loan comparison website.
Some even take LAP to meet their children’s overseas education cost. Take LAP only if you are confident that you will be able to repay; don’t rely on your children to repay it as they may not start working just as they graduate. Also, shop around for lower interest rates and cheaper processing charges.