A loan against property, also known as a mortgage, is a form of secured loan that enables individuals to utilise their property as collateral in order to obtain funds. Secured loans ensure that lenders have a reliable means of recouping their loaned amount from the borrower’s assets. With a loan against property, your property serves as a valuable asset that guarantees repayment of the loan. This type of loan offers the advantage of high loan amounts and longer repayment terms, making it a prominent feature of loan against property products. However, in order to find the most suitable loan against property, it is crucial to have a clear understanding of the key terms associated with LAPs. Acquiring knowledge of these significant terminologies pertaining to loans against property can prove beneficial.
Within the realm of finance, the term “mortgage” serves as a synonymous expression for a loan secured against property. The term itself conveys the act of pledging or relinquishing an immovable asset, such as a residence, plot of land, edifice, or any other form of property, in exchange for obtaining funds based on the value of said property. Notably, a distinguishing characteristic of a loan against property or mortgage is that the borrower surrenders their ownership title to the lender. However, upon the borrower’s complete repayment of the loan, ownership of the property is restored to them.
Loan-to-Value Ratio (LTV) is a crucial factor in Loans Against Property (LAP), as it determines the maximum loan amount you can obtain. This ratio is determined by dividing the borrowed loan amount by the fair market value of the property. It is important to note that the fair market value differs from the government-set market value. The fair market value represents the property’s price in the open market, reflecting what a willing buyer would pay. Lenders typically offer loans against property ranging from 40% to 80% of its fair market value.
FOIR, also known as Fixed Obligations to Income Ratio, serves as a metric utilized by banks and non-banking financial institutions (NBFCs) to assess a borrower’s eligibility for a loan. This formula takes into account the borrower’s financial commitments in relation to their gross or net monthly income. Notably, a loan against property is one such financial obligation. However, when calculating the FOIR, the borrower’s payments towards statutory deductions, such as Provident Fund contributions, fixed deposit taxes, professional taxes, and other specified investments, are excluded from consideration.
Principal Loan Amount
The loan principal amount refers to the sum disbursed to the borrower upon approval of the loan application by the lender. However, during the repayment process, the borrower is required to repay both the initial principal amount received at the time of approval and the interest imposed by the lender. Merely repaying the principal alone will not suffice, as the value of money undergoes fluctuations over time due to external factors such as inflation, banking regulations, and market conditions.
Tenure refers to the designated period, typically stated in years, during which the borrower repays the loan amount to the lender. It commences from the day the loan against property or any other loan is disbursed into the borrower’s account. Throughout the loan duration, the borrower is obligated to make fixed monthly installments (EMIs) as per the agreed-upon terms and conditions. The duration of a loan against property can vary from 3 to 30 years. Generally, longer durations entail lower EMIs.
Equated Monthly Installments (EMIs) represent the regular payments that must be made to the bank or Non-Banking Financial Company (NBFC) for any loan, including a loan against property. EMIs encompass both the principal loan amount and the monthly interest payments. The calculation of EMIs depends on various factors such as the desired loan amount, the chosen interest rate, and the loan tenure. These EMIs are deducted within the same timeframe, serving the interests of the lender and signifying your responsibility to repay the loan. Many lenders provide an EMI calculator to help determine the precise value of the EMIs to be paid.
The property title refers to the individual who legally owns a specific property or whose name is officially registered and acknowledged in accordance with the existing real estate laws. When obtaining a loan against a property, it is necessary to temporarily transfer the ownership title to the lender for the duration of the loan or until full repayment. In cases where multiple individuals co-own a property, such as a house, land, or building, any co-owner intending to mortgage the property must obtain a no-objection certificate (NOC) from the other co-owners.
Floating and Fixed Interest
The concepts of floating interest and fixed interest are self-explanatory. With fixed interest, the interest amount to be paid for a loan remains constant throughout the loan’s duration.
On the other hand, in the case of floating interest, the lender notifies the borrower that the interest rate is subject to change based on external factors such as inflation, market fluctuations, adjustments in the benchmark rates set by the Reserve Bank of India, and similar influences. Despite these fluctuations, floating interest rates generally remain lower than fixed interest rates. It is common for various loans, including loans against property, to feature floating interest rates.
In the realm of loans, foreclosure refers to the act of fully repaying a loan prior to its scheduled maturity. When borrowers opt to settle the loan in its entirety before the final Equated Monthly Installment (EMI) date, lenders deem it as a foreclosure or early closure of the loan. While foreclosure can exempt borrowers from paying interest on the loan against property, lenders impose a distinct foreclosure charge for prematurely terminating the loan. It is important to note that foreclosure differs from prepayment, where the borrower pays the EMI prior to the designated date.
The act of balance transfer involves moving the remaining or outstanding loan amount from one lender to another. Borrowers opt for this option to benefit from competitive and cost-effective interest rates offered by a different lender. Many lenders facilitate seamless balance transfers. The interest rates for loans against property typically span from 9% to 18%.
While the term “amortisation schedule” may appear daunting, it essentially refers to a structured timetable or tabulation that presents a detailed breakdown of the loan amount you are obligated to repay. This table outlines the precise proportions of principal and interest that must be paid on a monthly basis until the conclusion of the loan’s duration. Importantly, the amounts delineated in the amortisation schedule remain consistent throughout the tenure.
A processing fee is an amount levied by a lender to cover the expenses associated with the loan application process. This fee encompasses tasks such as collecting, verifying, managing, sanctioning, and other administrative and loan-related activities. The borrower is charged this fee by the lender in exchange for diligently handling every aspect of the loan process. Typically, the processing fee is kept minimal by most lenders. Furthermore, lenders also factor in the tax liability when determining the processing fee.
Prior to delving into the realm of loans and examining their features, benefits, and eligibility criteria, it is essential to grasp these fundamental yet significant terminologies associated with loans secured against property. Acquiring knowledge of these terms can assist in identifying the most suitable loan against property. You can rely on Poonawalla Fincorp to provide guidance and demystify intricate loan terminology and features, simplifying the process for you.