Can I Avail a Loan Against My Existing Property to Buy a New House?

Can I avail a loan against my existing property to buy a new house? Theoretically speaking, you can do so. No law prohibits you from doing that. However, you should consider various factors before deciding on applying for a Loan Against Property (LAP) for financing your new house.

Understand the Subtler Aspects of a LAP

The LAP is a secured Personal Loan. The concept of the LAP is similar to the Personal Loan in many ways except for the fact that you provide collateral in the form of equitable mortgage of property for the former one.

Let us look at the similarities between the LAP and the Personal Loan:

• The eligibility criteria (take-home pay norms) for availing Personal Loans and LAP are the same.
• The borrower need not disclose the reason for availing the Personal Loan as well as the LAP. They have to declare that they will not use the loan for speculative and other illegal purposes.

Here are some differences between the LAP and the Personal Loans:

• Banks charge a higher rate of interest for the Personal Loans as compared to the LAP because the Personal Loans are unsecured.
• The banks have stricter norms regarding the credit history of the borrower for a Personal Loan in comparison to the LAP. Usually, banks insist on a credit score of around 700 and above for unsecured Personal Loans. As you offer collateral in a LAP, you get some relaxation in this aspect.

Availing a Home Loan is Cheaper

The Home Loan is one of the most inexpensive loans in the financial market. Banks and NBFCs (Non-Banking Financial Companies) provide Home Loans at attractive rates starting from 8.35% p.a. In comparison, the Loan Against Property Interest Rates are a bit higher. The interest rate for LAP starts at 9.25%.

Let us look at the similarities between the Home Loan and a Loan Against Property:

• The processing of the Home Loans and the LAP is similar in many respects because both these loan facilities involve an equitable Hence, banks have to ascertain the value and genuineness of the title of the property.

The similarity between the Home Loans and LAP ends here. Here are some points on which the LAP differs from a Home Loan. Consider these points before you decide to avail a LAP to buy a new property:

• We have already seen the difference in the interest rates and the margin.
• Availing a Home Loan is more comfortable as compared to the LAP because of lenient eligibility norms regarding take-home pay and credit scores.
• You do not get income tax concessions when you take a LAP for purchasing a new house because these concessions are only available for a Home Loan. You can claim deductions in the repayment of the interest amount up to 30,000 only if you avail the LAP for repairs and renovation of your home.

Additional Info: Loan against Agriculture Land

Why Do Banks Charge a Higher Rate of Interest on the LAP as Compared to a Home Loan?

It is a valid argument. You are offering similar security in the form of an equitable mortgage. In fact, your margin is higher in case of the LAP. However, the rate of interest is lower for a Home Loan. Let us examine the reasons for the same.

• Banks provide Home Loans to construct or buy a house. Hence, you create a tangible asset out of bank finance. It is not the case in the LAP. The banks do not know the end use of their funds. You are free to use the loan in any manner you like.
• The risk weight for a LAP is higher because it is a Personal Loan, albeit secured. In comparison, the Home Loans attract a lower risk weight.

Occasions When People Take a LAP to Buy a New House

The eligibility norms for a Home Loan are lenient in comparison to the LAP. Hence, the borrower who is eligible for a LAP is also eligible for a Home Loan. There should not be any reason for the borrower to avail a higher-priced loan when an inexpensive option is available.

The only reason for the borrower to go for a LAP is when the borrowers have more than three properties in their names. Specific banks give Home Loans for acquiring up to three properties. You do not get a Home Loan to acquire a fourth property. Under such circumstances, the LAP is the best option. In response to the original question, the answer is, “Yes, you can, but should you? Weigh the factors discussed above and decide whether to go for a LAP to finance your new house.