Low cost fund for your business - LAP or Mortgage loan

In covid-19 pandemic also how lap is useful?

As the nationwide lockdown continues, some leading banks in India have introduced special schemes for businesses and individuals to help them deal with emergency expenses, resulting from the ongoing COVID-19 crisis. With the recent crash in the market, redeeming your Mutual fund units at lower net asset values will hardly do any good.

The lowest cost of fund can be arranged from banks by taking Mortgage loan or LAP. Loan against property is one of the most common forms of a secured loan where you can pledge any residential, commercial or industrial property for availing the funds required. The loan amount disbursed is equivalent to a certain percentage of the property’s value [LTV] and varies across lenders. If there is any temporary disruption in the cash flows, and in some cases loss of income, for the businesses/ individuals, the mortgage loan will bring relief to such borrowers. Tenure of Loan varies from 5 years to 15 Years

RBI has permitted Bank to grant a moratorium of three months on payment of all installments falling due between March 1, 2020 and May 31, 2020. Hence, Bank will not raise the installment demand during this period and Borrowers availing this concession are not required to pay the Installment during the period. Accordingly the residual tenor of repayment schedule will be extended by some months.

One of the key benefits of loan against securities is it comes cheaper compared to business and personal loans. Since the loan is backed by an asset, the interest rates are lower than that of a business loan [18%] and are typically in the range of 9-12 per cent, based on collateral.

Similar to other borrowing options such as business loan, top up home loan and gold loan, loan against property does not restrict usage of loan proceeds, except for illegal or speculative purposes. The funds can be used for various purposes such as child’s higher education, business expansion, foreign vacation, etc.

Not many borrowers are aware of the tax benefits available on loan against property. Tax benefits that depend on the end use of the money borrowed. First, under Section 37(1) of Income Tax Act, the interest paid and associated costs such as processing fee and documentation charges can be claimed as business expenditure.

Second, if the money is used for the purpose of financing/purchasing another house property, then, interest repaid can be claimed under Section 24(b), up to Rs 2 lacs in a financial year, provided the borrower is conclusively able to establish a link between the money borrowed and its ultimate use. However, unlike home loans, borrowers cannot claim any tax benefit on the principal repayment of loan against property.

Other than interest rate, that one should consider while comparing and choosing loan against property from various banks:

•      Current best offer on processing charges as these tend to vary from time to time
•       Service quality, especially post sales service quality
•     Add-on features – like DBS maxgain facility and Citibank Home Credit facility – these help borrowers to save interest by parking surplus funds temporarily in the account and paying interest on net difference between loan amount and surplus parked temporarily
•      Higher loan to value of property ratio [LTV]

Stay Safe, stay focus.

With love

Amit