Common Mistakes You Must Avoid Making When Applying for a Loan Against Property

Loans against property are a secured mode of financing - a borrower pledges their property as collateral and in return, receives a set loan amount from the lender. The borrower repays this loan in the form of EMIs over a stipulated period. Loans against property come with a long tenor stretching up to 18 years. Further, these loans are offered at low-interest rates - currently, loan against property interest rates vary between 9.75%* and 18.00%*. 

When a borrower takes a loan against a property, they retain ownership rights over the property they have pledged as collateral. In simpler words, the borrower can continue to use the property as they like even if they have taken a loan against it. Lenders, however, can sell the property for loan recovery in case of loan default. However, even in this case, the borrower is protected by certain rights, terms and conditions. For instance, the lender cannot sell the property for loan recovery without giving the borrower notice as well as enough time to arrange money to clear pending dues and save their property.  

There are many things that borrowers do not know about this mode of financing. In this article, we look at common mistakes that one should avoid making while taking a loan against property.  

Common Mistakes that Borrowers Must Avoid Making While Taking a Loan Against Property

Not Negotiating for a Low-Interest Rate 

The loan against property interest rate you are offered will determine how affordable or easy it will be for you to repay the loan. 

Loans against property are big-ticket loans often involving a substantial amount of money. Therefore, even a small difference in the interest rate offered can make a huge difference to the total interest paid by you throughout the loan journey. Borrowers must, therefore, negotiate hard for a good interest rate.  

Shop for interest rates. Talk to as many lenders as possible and get quotes. Use these quotes to bargain with lenders. Sign on the dotted line only if you are convinced that you cannot get a better/lower interest rate than what you have been offered.  

Not Considering Processing Fee and Prepayment Penalty Charges While Assessing the Cost of Borrowing

The processing fee for loans against property varies between 1% and 3% of the total loan amount. Since loans against property are big-ticket loans, the processing fee turns out to be a major expense that increases the cost of borrowing. Most borrowers do not consider the loan processing fee while calculating the total cost of borrowing.  

Similarly, borrowers also do not inquire about prepayment and foreclosure charges while taking a loan against property. Prepayment penalties or foreclosure charges are the fees one must pay if one decides to close their loan before the stipulated time. Borrowers must talk to their lenders and get clarity on these fees and charges before accepting the loan agreement. 

Not Keeping Any Buffer Time

As mentioned before, loans against property involve a substantial amount of money and therefore, lenders approve, sanction and disburse these loans after proper due diligence. It is, therefore, not very surprising that loans against property approvals take some time. While some lenders take weeks to approve and disburse these loans, some lenders are able to sanction these loans within only a few days. So, if you need money urgently, go with a lender known for a quick approval.  

Not Having Documentation in Place 

As mentioned before, lenders sanction loans against a property after proper due diligence. Therefore, borrowers must be able to provide all the paperwork as and when asked. Most borrowers often do not have all the documents needed for loan approval and processing. For instance, many borrowers apply for a loan against property without income proof. A lender can't sanction a loan against property without ITR. Thus, those borrowers who want to experience a hassle-free and smooth loan journey, must go to their lender's website before beginning the loan application process and check the list of documents required before beginning the loan application process.  

Not Reading the Fine Print

Borrowers opt for a loan against a property when they need money urgently to take care of a dire personal or professional need. Thus, sometimes, in their hurry to get money into their account, they forget all about reading the loan terms and conditions. This is a mistake one should never make - loans against property are a long-term expense/commitment and even a small mistake can prove to be costly. So, sign on the dotted line only after you are fully convinced and agree with all the loan terms and conditions. If there is something you do not understand, hire a lawyer to help you understand the terms and conditions mentioned in the agreement but do not sign on the dotted line until you fully understand and agree with everything. 

Not Getting Your Property Assessed

Lenders sanction anywhere between 50% to 70% of a property's value as a loan. However, lenders sometimes undervalue a property. Thus, before beginning your loan against the property application process, hire a professional to assess your property and calculate its value. This will help you get the right loan amount from your lender.  

Borrowing More Than One Can Easily Repay

Borrowers who have availed of a loan against property are protected by certain rights. However, it cannot be denied that in case of loan default, they can lose ownership of their property. Since loans against property involve collateral, borrowers must be extra careful about how much they are borrowing and whether they will be able to easily repay what they have borrowed.  

Your property may be worth 10 Crore and a lender may be readily willing to offer you a loan of 5 Crore against it but if you don't need that kind of money, don't borrow it. Borrow only what you need and what you can easily repay. This will help you take care of your financial emergency while also keeping your property safe.  

Final Words

Loans against property involve collateral. Therefore, borrowers cannot afford to make any mistakes with these loans. In this article, we have discussed some of the common mistakes that borrowers make while availing of a loan against property. We hope that being aware of these mistakes will stop you from making them while availing of a mortgage loan in India.