Loan Against Property: How to Mortgage Your Property Without Selling It

At different stages of life, you may need funds for various reasons — from financing your child’s higher education or starting a business to meeting unexpected medical expenses or other major financial commitments.

If you own a property, you may be able to use it as security to obtain a loan. This is commonly known as a Loan Against Property (LAP).

The basic idea is simple: you can raise money against your property without selling it or transferring its ownership to the lender.

What does it mean to mortgage a property?

A mortgage is an arrangement between a borrower and a lender under which the borrower creates a security interest over the property in favour of the lender to secure repayment of the loan.

The borrower continues to own the property. However, if the borrower fails to repay the loan as agreed, the lender may enforce its security rights and recover the outstanding amount from the property, subject to the applicable legal process.

Therefore, a mortgage does not mean that you are selling your house to the bank. The property is being offered as security for the loan.

What types of property can be mortgaged?

Depending on the lender's policies and the nature and title of the property, loans may be available against properties such as:

• Residential properties – houses, flats and other residential buildings
• Commercial properties – shops, offices and commercial buildings
• Vacant land or plots – subject to the lender's eligibility requirements
• Certain leasehold properties – where the lease and applicable permissions allow creation of security

Agricultural land requires special consideration. Not every lender accepts agricultural land as security for a Loan Against Property, and the eligibility can depend on the nature and use of the land and the applicable State laws.

Further, Section 31(i) of the SARFAESI Act, 2002 excludes security interests created in agricultural land from the operation of the SARFAESI Act. This does not, by itself, mean that agricultural land can never be mortgaged or that a loan can never be obtained against it.

Who can avail a loan against property?

Generally, the owner or title holder of the property can approach a bank, NBFC or housing finance company for a loan against the property.

However, owning a property does not automatically guarantee a loan.

The lender will normally assess:

• Your ownership and title to the property
• The market value of the property
• Your income and repayment capacity
• Your existing loans and financial obligations
• Your credit history and credit score
• The location and nature of the property
• The lender's internal eligibility criteria

Is income important if I am giving my property as security?

Yes.

Even though the property is being offered as collateral, the lender still needs to assess how you will repay the loan.

The value of your property is only one part of the lender's assessment. Your income, financial stability and repayment capacity are also important.

Can you use the loan for any purpose?

A Loan Against Property can generally provide greater flexibility than a loan specifically tied to the purchase of a particular asset.

The permitted use of the loan will depend on the loan agreement and the lender's terms and conditions.

You may be required to state the purpose of the loan in your application. You should therefore use the borrowed funds in accordance with the terms agreed with the lender and for a lawful purpose.

Do not assume that because the loan is secured by your property, the lender will have no restrictions on how the money can be used.

Do you lose ownership of your property after mortgaging it?

No.

Mortgaging your property does not ordinarily transfer ownership of the property to the lender.

You continue to be the owner and, depending on the type of mortgage and the terms of the agreement, you may continue to possess and use the property.

The property is provided as security for repayment of the loan.

If you repay the loan as agreed, the lender's security interest is released in accordance with the applicable documentation and procedure.

However, if you default on the loan, the lender may take steps to enforce its security and recover the outstanding amount, subject to the applicable law.

What happens if you do not repay the loan?

This is one of the most important things to understand before taking a Loan Against Property.

If you fail to make the repayments, the lender may initiate recovery proceedings in accordance with the loan agreement and applicable law.

In cases where the SARFAESI Act applies, a secured creditor may have statutory remedies for enforcement of the security interest without approaching the court in the manner provided under that legislation.

Ultimately, the property offered as security can be at risk if the borrower does not repay the loan.

Therefore, do not mortgage a property merely because you own one. Make sure that the EMI is comfortably within your repayment capacity.

Does your credit score matter?

Yes.

Offering a property as collateral does not mean that the lender will ignore your credit history.

Banks and financial institutions may consider your:

• Credit score and credit history
• Existing loans and repayment record
• Income and financial stability
• Bank statements and other financial information
• Overall repayment capacity

If you have never taken a loan or used a credit facility before, you may be considered a New-to-Credit (NTC) applicant.

Being new to credit does not necessarily mean that your loan application will be rejected. The lender may assess your financial position through your income, employment or business stability, bank statements, assets and other relevant information.

What documents should you keep ready?

The exact documents required will vary depending on the lender and the property.

Property-related documents

You may be asked to provide documents such as:

• Sale deed
• Parent or link documents establishing the title
• Partition deed, settlement deed, gift deed or other relevant title documents, where applicable
• Encumbrance Certificate (EC)
• Property tax receipts
• Approved building plan, where applicable
• Building approval or completion documents, where applicable
• Other documents required to establish clear and marketable title

Borrower-related documents

The lender may also ask for:

• Identity proof
• Address proof
• PAN and other KYC documents
• Salary slips or proof of income
• Bank statements
• Income-tax returns or financial statements, where applicable
• Details of existing loans and financial obligations

The lender may also conduct its own legal and technical due diligence on the property before approving the loan.

How do you apply for a Loan Against Property?

The process generally involves the following steps:

1. Approach a lender

You can approach a bank, NBFC or housing finance company offering loans against property.

2. Submit your application

Provide the required personal, financial and property documents.

3. Property verification

The lender may conduct legal verification of the property's title and other documents. A technical valuation of the property may also be carried out.

4. Financial assessment

The lender assesses your income, credit history, existing liabilities and repayment capacity.

5. Loan approval

If the lender is satisfied with the property and your financial profile, it may sanction the loan.

6. Creation of security

The necessary mortgage/security documents are executed and the lender's security interest is created in accordance with the applicable law and the terms of the loan.

7. Disbursement

After completion of the required formalities, the loan amount is disbursed.

Before you mortgage your property

A property may be one of your most valuable assets. Therefore, taking a loan against it should be a carefully considered decision.

Before signing the loan documents:

• Compare interest rates offered by different lenders.
• Understand the processing fees and other charges.
• Check the applicable prepayment or foreclosure charges.
• Understand the consequences of delayed EMI payments.
• Read the loan agreement carefully.
• Check whether there are restrictions on the use of the loan.
• Make sure the EMI is affordable even if your income temporarily falls.
• Understand what can happen to the property in case of default.

The Last Lines

A mortgage allows you to unlock the financial value of your property without selling it.

You retain ownership of the property, while the lender receives security for the loan. However, the property is not risk-free merely because you continue to own it. If you fail to repay the loan, the lender may enforce its security rights in accordance with the applicable law.

So, before mortgaging your property, understand both the financial terms of the loan and the legal consequences of creating a mortgage.