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In the past one year, banks have actively beefed up their loan against property portfolio. Post October 2008 credit crunch, bankers looked for products that were secured and Loan against property (Lap) was an obvious choice.
Lap was essentially a domain of foreign and private banks. They offered the product to fund their self-employed customers' business-related needs. Lately, all banks are offering this product including the public sector banks.
This has come as a boon for borrowers who need large sum of money to fund their emergency financial needs. Bankers said that mostly salaried customers take Lap when they need money for marriage or foreign education of kids, when they are buying a new property and are renovating their house. Self-employed seek this loan to fund their business needs and to pay off debt.
In Lap, customers can avail up to 50 per cent loan of the existing property value. The interest rate in Lap is around 200-300 basis point higher than bank home loan. This is a floating rate loan. "Lenders see more risk in this product and so price it higher," said a banker. The current rate can range between 12-14 per cent.
The minimum loan that banks disburse in this product is around Rs 2 lakh - HDFC Bank is an example. Foreign banks,& have higher limits, some look for minimum loan size of Rs 20 lakh.
"The amount of loan disbursed depends on the end use. For instance, if the property is Rs 2 crore, obviously we will not sanction a loan of Rs 1 crore for renovation of the house," said head of retail assets with a foreign bank. Before taking the loan, the borrower needs to sign a declaration stating the end-use of fund.
If the property is currently not under any mortgage, the process to avail a Lap is simpler as compared to a mortgaged one. In the former, the process is similar to taking a housing loan.
The customer needs to give evidence for being able to pay the instalments. For this, the borrower needs to submit a salary proof and income tax certificates. The bank, then, comes down to evaluate the property. A no-objection certificate, is also required, from the society.
In case of a mortgaged property, the person can go for a top-up loan with the bank he has an ongoing loan with. In this case, the bank will fund the difference between the outstanding and the original loan taken.
For example: A person has taken a Rs 30 lakh loan for the property that was worth Rs 40 lakh at the time of purchase. He has an outstanding is Rs 20 lakh. The same bank will give him a top-up loan equal to the difference between the outstanding and the original loan, even if the property cost has risen. Here, it would be Rs 10 lakh.
However, if fund requirement is higher the borrower can approach another bank and opt for a product called 'balance transfer plus top-up'. This is part of Lap. The other bank will take fresh look at the property value, take over the loan and lend up to 50 per cent of the existing value.
In the above example, if the house price is now Rs 70 lakh, the bank will take over the Rs 20 lakh outstanding. The customer can avail funds up to Rs 15 lakh (50 per cent of the property value, which is Rs 35 lakh, minus the existing loan of Rs 20 lakh).
