When using your home as collateral...

With the cost of living rising continuously, there is a constant need for funds throughout the year due to various reasons — business, personal etc.

You may not be aware that apart from various financing options that are available, your home can also provide you access to funds. If you have a property in your name, this asset can be used as a collateral for availing loan from any financial institution through a product popularly called as Loan Against Property or LAP. In case the property has been bought with the help of a home loan and you are still paying equated monthly installments (EMIs), you can take a ‘top-up’ on the property to meet funding requirement from your existing lender.But, remember, there are points that should be kept in mind before using your home as a collateral.

What is it?

Loan against property (LAP) is a popular means of availing loans from financial institutions (including banks) against mortgage of existing commercial or residential immovable property. This loan can be required for various purposes such as business expansion, education, wedding of children, medical reasons, furnishing of house etc (it has to be for a legitimate purpose, of course). The financial institution shall evaluate the property in focus to ascertain its market value and sanction an amount against it after a thorough legal and technical verification. This amount sanctioned is generally up to 70% of the total property value; but may vary from lender to lender.

How to choose your lender

With such a large buffet of financial  institutions available today, it is important to make a wise decision. Go with a lender who/which offers a higher corpus that can fulfill your financial need at a competitive rate of interest. But that should not be the only criterion to make the
decision. Choose a lender that enjoys high brand value along with consumer trust. Do give a thought to whether your lender is offering you a customised solution with customer-friendly features, because a lender that understands your need will be keen to make this partnership pleasant and comfortable for you in the long run. Different lenders offer different loan tenures and you may decide on an appropriate period after assessing your repaying capacity and other monthly expenses. However, remember that a higher tenure shall reduce the EMIs significantly, but at the same time will increase your total outflow towards the repayment of the loan.

Benefits & caution

Using your  property or home as collateral opens doors to a high value loan at one go, but, at the same time puts you under an obligation to repay the loan strictly on time, as your own home is at risk. Any delay or defaults in this can make you lose your home; one of your most precious assets. Therefore, it is of utmost importance that you assess your repaying capacity before going ahead with the LAP offer. To make things easy, many lenders offer EMI calculators on their websites where you can gauge the monthly outflow towards the anticipated loan amount. Use this tool to ascertain the amount that you can potentially borrow, considering all your expenses before making a commitment.

Property evaluation procedure

When you approach a financial institution for LAP, they will take your property’s details for a thorough legal and technical verification. During the legal appraisal, the property will be evaluated to ensure that it is devoid of any encumbrances, while technical verification is done to gauge the appropriate market value of the property. Only after a satisfactory appraisal will the financial institution go ahead with the sanction of the loan amount. But remember, as an applicant, you will be required to submit certain documents as proof of ownership, such as:

l  Original property papers: As the owner of the property, you are supposed to furnish the original property documents and the approved plan. Along with this, in case you are not the first owner of the property, you are supposed to provide the complete property chain.

l  Completion of all dues: Before approaching a financial institution for LAP, ensure that all charges and government taxes like house tax, water tax, electricity tax etc are duly paid. The prospective lender may ask you to furnish the latest tax payment receipts in many cases.

And in case...

So, what happens if you don’t make your repayments? While financial institutions have to follow the assigned processes, they will definitely give you enough time to repay your dues. They are experienced in dealing with such situations and will try their best to resolve genuine problems faced by customers. But remember, it is your moral and legal obligation to repay the financial institution its due amount. Hence, it is strictly advisable to follow the timelines prudently. And any delay in the due payment can even call for penal charges.

On closure of loan account

When you near the last term of the loan tenure, paying the last EMI is not the only parting step. Once you close the loan  account, ensure that you collect all the original property documents from the lender and check if they are in order. Do not forget to take a ‘No Due Certificate’ from your lender as it certifies that you are not liable for any further payments to the financial institution. Using your home or other property as collateral to raise money for business needs or other personal needs can be a safe option. The onus of keeping it safe, of course, lies with the borrower. So, estimate your repayment ability before deciding on a loan amount.

(The author is business head & general manager, PNB Housing Finance Limited)