A loan against property or mortgage is a type of secured loan that allows you to pledge or keep your property on hold to receive funds. Secured loans are where the lender has a sure source of getting their loaned money back from the borrower's assets. In a loan against property, your property is a bankable asset and works as a guarantee that you can repay any loan amount taken. As a loan against property is a secured loan, you can get a high loan amount against your property for a longer tenure – one of the core features of a loan against property. However, to search for the ideal loan against property, you need to comprehend the major terms surrounding a LAP. Knowing these important terminologies about loans against property can help.
In the financial world, a mortgage is another word for loan against property. The literal meaning of mortgage is the pledging or giving up of an immovable asset like a home, land, building, or any other property in exchange for receiving funds against that property. One of the features of loan against property or mortgage is that the person borrowing the funds against their property has to give up their ownership title to the lender. Once the borrower repays the loan, their property will belong to them again.
LTV or loan to value ratio in LAP is a value or ratio that determines the amount of loan against property you can get. It is a ratio arrived at by calculating the borrowed loan amount with the fair market value of the property. The fair market value of a property is different from its market value. It is the price of the property in the open market or what a buyer would be willing to pay and not the price value set by the government. Lenders offer between 40% and 80% of the fair market value as a loan against property.
FOIR or Fixed Obligations to Income Ratio is a system or metric used by banks and non-banking financial institutions (NBFCs) to determine how eligible is the borrower to take a loan. The FOIR formula considers your financial obligations against your gross or net monthly income. A loan against property is an example of a financial obligation. In the calculation of FOIR, the borrower’s payments towards statutory (government) deductions like a Provident fund, fixed deposit tax, professional tax, and other specified investments are not considered.
Principal loan amount
The principal loan amount is the amount given to the borrower after the loan application gets approved by the lender. However, while repaying the lender, the borrower has to pay the entire principal sum received at the time of approval and the interest charged by the lender. The principal by itself will not be enough to repay the lender, as over the years the value of money will change due to external factors like inflation, bank rules, and market conditions.
Tenure is the timeframe or the number of years you will be paying off the loan amount taken by the lender to the lender. The tenure of a loan against property or any loan always starts from the day it gets disbursed to the borrower’s account. During the tenure, you have to pay the EMIs as fixed under the terms and conditions of the loan. The tenure of a loan against property can range anywhere between 3 to 15 30 years. The longer the tenure, the lesser the EMIs.
EMI or equated monthly instalments are the sums of money you must pay every month to the bank or NBFC for any loan taken, including a loan against property. EMIs are a total of the principal loan amount and the monthly interest payments payable. They get calculated based on your desired loan amount, the preferred interest rate, and loan tenure, among other factors. EMIs get cut during the same window, in favour of the lender and your obligation towards repayment. Most lenders have an EMI calculator you can use to find the value of the EMIs payable.
Property title is the person who is the owner of a particular property or on whose name a particular property is written and recognized by the prevailing estate laws. When you take a loan against a property, you have to give up the ownership title to the lender for the tenure of the loan or up to repayment. As more than two owners can own a property like a house, land, or building, the co-owner must get a no-objection certificate (NOC) from the other co-owners before mortgaging their property.
Floating and fixed interest
Floating interest and fixed interest are just like they sound. In fixed interest, the interest payable for a loan remains the same during the loan tenure.
In floating interest, the lender informs the borrower that the interest rate can change depending on external influencing factors like inflation, market fluctuations, changes in the Reserve Bank of India benchmark rates, and the like. However, despite the fluctuations, floating interest rates are lower than fixed interest rates. Most loans, including a loan against property, have floating interest rates.
Foreclosure, in loan vocabulary, is the closing off or repayment of a loan before its due date. When borrowers decide to repay the loan in full before the last EMI date, lenders consider it a foreclosure or early closure of their loan. While a foreclosure can save you from paying an interest rate over the loan against property, lenders levy a separate foreclosure charge for closing the loan before it is due. Foreclosure is not the same as prepayment, where the borrower pays the EMI before the fixed date.
A balance transfer is a process of transferring one’s remaining, outstanding, or balance loan amount from one lender to another. Borrowers choose the option of transferring their loan amount balance to an account with another lender because of getting competitive and affordable interest rates different from their existing lender. Most lenders allow for easy balance transfers. The interest rate for a loan against property range anywhere from 9% to 18%.
An amortisation schedule might sound intimidating, but it simply means a schedule or table that displays a breakup of the loan amount you must repay. The table shows the exact percentage of the principal and interest rate payable each month up to the end of the loan tenure. The amounts in the amortisation schedule are equal during the tenure.
A processing fee is a sum charged by a lender for taking care of the loan application process. From the collection, verification, management, sanction, and other administrative and loan handling purposes – the lender charges the borrower a fee for taking care of every detail of the loan process. The processing fee is usually minimal at most lenders. Lenders also account for tax liability in the processing fee.
Before dabbling in the world of loans and checking its features, benefits, and eligibility, knowing these basic yet major loans against property terminologies can help find the ideal loan against property. Place your trust in Poonawalla Fincorp to guide you in understanding and demystifying complex to simple loan jargon and features of loan against property.
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