All You Need To Know About Loan Against Property Overdraft
While buying a home is a big financial responsibility, loan against property comes handy if you are thinking of applying for another loan to meet your short-term requirements. Loan Against Property- Overdraft (LAP-OD) is a facility provided by banks to acquire short-term funds against an asset. Being a home loan borrower is hard enough, but if you are faced with an emergency situation, things become even more difficult for you. LAP-OD can come handy in such circumstances.
How LAP-OD work?
LAP-OD is a short-term credit provided to borrowers against a property. You can provide either your residential or a commercial property as a collateral. The bank will get the technical and legal valuation done of this security by an empaneled valuator. After that, the bank funds a certain percentage of the market value of this property.
For instance, if the market value of your property according to the technical evaluator's report is Rs 1 crore and the bank funds up to 50 per cent of the market value as a policy, you will be eligible for the LAP-OD of Rs 50 lakh. But, this amount will not be disbursed immediately. This is where the overdraft (OD) part of the product comes into the picture. The lender will open an overdraft account for you in which you will be assigned a limit of Rs 50 lakhs (i.e. an approved LAP-OD loan amount). You can withdraw the amount from this overdraft account, as and when you need. You will be liable to make the interest payment (i.e. equal monthly instalments or EMIs) from the time this LAP-OD is availed of.
Apart from the market value of a property, your credit history, repayment capacity, stability of business and the income, experience, age norms, number of assets and liabilities and many such factors are considered while deciding on the LAP-OD loan amount.
Self-employed professionals and non-professionals.
Rate of interest (ROI):
The ROI of LAO-OD varies from 12 per cent to 14.50 per cent.
LAP-OD is mostly given for the maximum period of 24 months. The limit might get renewed at different intervals, at the discretion of the lender.
At least one co-applicant is compulsory on availing of an LAP-OD loan. All the owners of the property given for mortgage, should mandatorily join the LAP-OD loan application.
FOIR (fixed-obligation-to-income ratio) and LTV (loan-to- value ratio):
The maximum FOIR and LTV provided by most of the lenders in case of LAP-OD is 70 per cent.
Minimum area of an asset:
The minimum built up area for a residential property is 300 sq. ft. and a commercial property is 250 sq. ft.
Enhancement in sanctioned LAP-OD limit:
Any increase will be the bank's discretion. The financials of the borrower must justify the demand of OD limit enhancement and must comply with the LAP-OD norms of the bank.
Many lenders make it imperative for the borrowers to route their business proceeds through the LAP-OD account.
A bank has the liberty to reduce the LAP-OD limit facility in case of an unsatisfactory conduct by the borrower. In case of default beyond 90 days, the account shall be classified as a non-performing asset (NPA).
Quick tip for LAP-OD borrowers
It has been observed in the past that the money raised using the LAP-OD facility was often put in the share market, which is a strict no-no according to banking norms. Stocks are a highly volatile asset class. If you lose the LAP-OD money, you will be in a soup because you will be paying higher interest rate on the limit sanctioned, and will remain out of the contingency fund, for which you took the LAP-OD loan in the first place.