Loan against property: The best solution to raise funds

It is advisable to raise money against an existing property instead of selling it or liquidating another asset. We explain why.

At a time when India’s real estate market is faring quite poorly owing to very high prices, it would appear that potential home buyers would have a field day picking through unsold housing stock. However, buyers still await a price correction. 

Thus, it is quite an achievement if one can buy a house in today’s day and age. Owning your own property offers several key advantages. Not only is it a safe asset that appreciates in value over time, it offers quick liquidity when one needs to raise money. There are a couple of good avenues in which an owned property offers financial succour in an emergency. First, the owner may decide to sell it for a profit. Second, the seller may mortgage the property to raise money against its current market value. This second option is known as the ‘Loan against property’ and it is being availed of by a growing number of property owners in India today.

How does the loan against property work?

The loan against property is simply a mortgage loan granted against the current market value of the property. It is extended towards both residential and commercial owned properties. The property is pledged to the bank for the duration of the loan. The bank first evaluates the property for its documents, stability, current market value and owner’s credentials. If all the documentation is found to be in order, and if there is no other mortgage loan on it, the bank grants the loan against property to the owner.

Is it beneficial to take this loan?

Yes, it is. Consider the following reasons why:

• You only pledge the property to the bank for the duration of the loan – the property ownership is not transferred to the bank, and all earnings on it (rental income, for example) are still passed on to you.
• There is no need to sell the property to get access to emergency funds. You can also take this loan against a property that you currently reside in. The only stipulation is that the property must be a freehold title.
• The best banks in India offer these loans for a period of about 10 years, which may be extended at the bank’s discretion.
• The loan against property is more expensive than a home purchase loan and cheaper than a personal loan. Premier banks in India offer loan against property interest rates in the range of 11% to 14.5%.
• The bank does not concern itself with the reason for borrowing the loan against property. Hence, the money may be used for personal or professional emergencies.
• If you are unable to repay the loan, you can sell the property to repay the unpaid balance.