Loan against property: The dos and don'ts

Frequent balance transfer in search of a lower rate can be tricky for borrowers, if  property prices fall

Loan against property, or LAP, a popular way of raising money on a short notice for entrepreneurs, businessmen and individuals, seems to be running into rough weather.

A recent report from India Ratings says there have been rising delinquencies - as much as 30 per cent in the case of some lenders - due to stagnancy in prices and dilution of risk mitigation practices.

For instance, there is an increasing trend of accepting non-residential properties and unoccupied residential property. While selling, these might fetch lower value.

LAP is typically availed of by self-employed businessmen, professionals and entrepreneurs for business purposes. With the backing of a property, both banks and non-banking financial companies (NBFCs) are comfortable with it.

However, borrowers seeking loans through this route should remember only a portion - 60 to 65 per cent - of the property value will be granted to them.

In the case of a property on which a borrower is already paying a housing loan, the bank or NBFC will consider the rise in value and lend the same percentage. For example: If the property price has risen from Rs 50 lakh to Rs 65 lakh, a borrower can get loan of Rs 9–10 lakh. In a joint property, lenders might insist all joint owners be co-borrowers.

According to Manavjeet Singh, chief executive officer and founder of Rubique, an online marketplace for financial products, borrowers also need to be blamed for the stress because they are going for balance transfers aggressively to get higher loan amounts.

“There are a lot of balance transfers, as borrowers look for cheaper rates and higher loan amounts. They are able to get these due to the high competition. The stress, then, begins to show when property prices remain stagnant or come down,’’ he says.

Sumit Bali, head, personal assets, Kotak Mahindra Bank, says, “Borrowers should be clear that the property be leveraged only to raise money for business. Raising more money is raising more debt and that will put pressure on cash flows.’’

Interest rates on LAP are 10-12.5 per cent for banks and from 10.6 to 22 per cent in the case of NBFCs. The final rate depends on the type of property (residential, commercial, industrial) and the borrower’s profile and repayment capability.

Usually, loans are given up to a period of 10-15 years. The amounts available are as low as Rs 25,000 and as high as Rs 5 crore. Typically, ticket sizes are Rs 60-1 crore.

“Over the past 10 years, property prices have become meaningful. It is possible for small businesses to finance about 40 per cent of their capex (capital expenditure) through LAP. But, the loan should be used for productive purposes. Only then will money come back to the business,’’ says Ashwini Hooda, deputy managing director, Indiabulls Housing Finance.

Getting a loan isn’t very easy

Anyone who has a property in their name can get a loan against it. Lenders may seek the end-use of the loan before sanctioning it.

Properties considered include self-occupied-residential property/commercial property, self-occupied rented, self-occupied-vacant property and industrial property.

The lender’s legal team verifies the title and the technical team verifies the value of the property, the construction and whether it is built in line with the by-laws.

Indiabulls Housing Finance, for instance, gives loans only against a borrower’s primary residential property. In addition, the business has to be to seasoned for seven to 10 years and the borrower should generate enough income from the business to be able to service the loan, Hooda says.

“We refrain from giving funds for speculative purposes. Collateral is the only security if a customer defaults. The underlying cash flow is also assessed,’’ says Bali.

Documentation required

What is required include property documents, sanction plan of the property and completion certificate. Lenders have lawyers who check the legality and marketability.

They also have a valuation agency which provides a report and also does a check on construction and the sanctioned plan. Based on the report from lawyer and valuation agency, the loan is sanctioned.

Individuals have to show salary slips for the past six months, bank statements to show income for six months and proof of income tax paid.

For the self-employed or professionals, certified financial statements for three years and bank statements for the past six months are asked. Existing loans and credit rating are also checked. Some lenders insist the borrower buys property insurance before sanctioning the loan.

“The loan will not be sanctioned unless the property has a clear title deed and until the lender is convinced the documents are genuine,’’ says Singh.

In the case of businesses, banks and NBFCs look at the Ebitda (earnings before interest, tax, depreciation and amortisation) margins, debt-equity ratio and income tax returns to ascertain the cash flows.

Valuation may vary

Most lenders typically give 60-65 per cent of the property value as loan. This vary, depending on the kind of property, borrower’s record, etc. The valuation is done by valuation agencies appointed by lenders.

The value is arrived at by considering circle rates, age of the property, quality of construction, etc.

Illustration: Uttam Ghosh/Rediff.com