A home is more than just a shelter; it is a valuable asset whose price continues to appreciate over the long term. But, when a homeowner is faced with a financial emergency, he/she may have to consider selling it off. A far better alternative is to opt for a loan against property (LAP).
When a person selects a bank or NBFC to apply for an LAP, they must check the associated charges with the loan. This blog enumerates the different fees and charges on property loans.
Types of fees and charges associated with property loans
There are different types of fees and charges on property loans that a borrower must pay along with regular EMI. The charges vary between different banks and NBFCs. While some may levy high fees, others may forego some of these charges.
Here are some of the important fees and charges that applicants should be aware of before applying for a loan against property.
The first thing that most borrowers notice when comparing LAPs from different lenders is the interest rate. While the loan amount and tenure determine the interest rate, other factors such as an applicant’s credit score, income, age and property valuation also affect it.
Simply put, borrowers who fulfil the loan against property eligibility criteria qualify for lower interest rates. Lenders prefer a high-value property, shorter tenure and individuals with high credit scores and sufficient income as they lower their risk of lending money.
Another thing that applicants should consider is whether to choose a fixed or floating interest rate for a loan against property. While a fixed rate is more predictable, floating rates tend to be less expensive than floating rates. However, they are subject to quarterly revisions based on RBI’s repo rate.
When a person applies for a loan against property, lending institutions might charge a certain fee for processing their application. It is called the loan processing fee. This fee varies between banks and NBFCs and depends on the amount one seeks to apply for.
The processing fee is a non-refundable charge. So even if a bank/NBFC rejects an individual loan application, it will be deducted.
Therefore, before applying for a loan against property, the borrower must calculate the applicable processing fees and how much they affect the loan’s total cost. Today, some lenders do not charge processing fees for loans above a certain amount. This helps attract more customers to banks/NBFCs and build a transparent relationship.
This is also known as the log-in fee. The application fee is an initial fee that a bank/NBFC levies for evaluating an LAP application. Every applicant must pay this charge or fee on a property loan at the time of applying. Post-submission of an application along with this charge, banks/NBFCs will study and verify their application and the authenticity of the documents before sanctioning the loan.
With proper financial planning, a person can save a good amount of money by paying their dues early. He/she can use this amount to prepay their loan against property before the due date. This is called part prepayment of a loan.
However, certain banks and NBFCs charge a penalty fee for part-prepayment of loan EMI. Prepayment charges are applicable on fixed-rate LAP and non-individuals borrowers. However, as per the Reserve Bank of India’s guidelines, lenders cannot charge this fee for floating-rate LAP.
It is important to know whether a bank/NBFC allows loan prepayment before opting to do so. To decide whether to prepay a loan or not, one must have a thorough financial plan. One can chalk out such a plan only after calculating their monthly obligation. Borrowers can do so manually or use loans against property EMI calculators available online.
Similar to part-prepayment charges, various banks/NBFCs tend to charge a fee for the foreclosure of loans against property. This charge can vary between banks and NBFCs and depends on the outstanding amount. However, some banks/NBFCs might not charge any foreclosure fees. Therefore, one must thoroughly study associated fees and charges on property loans before applying for one.
Many banks/NBFCs provide pre-approved offers to long-standing customers with good credit scores. These offers come with several benefits like quick loan approval and no foreclosure or processing charges for loans against property. Borrowers can visit the online portal of their respective lenders to check their eligibility for pre-approved offers.
After submission of an LAP application, the lender will verify the given documents thoroughly. They will also perform a legal verification to ensure that the property does not have any pending legal liabilities. To do so, they might opt for on-site verification. This might incur extra charges which a borrower must pay at the time of application.
As legal charges vary among lenders, one must search and know the legal charge their lender levied before application.
Regulatory or statutory charges
Lenders also charge certain fees and charges on loans against property on behalf of statutory bodies. These charges can be in the form of GST or stamp duty charges. They are compulsory fees and depend on the price of the mortgaged property. Lenders collect these regulatory or statutory charges and pay them to the government.
There may be a situation where a borrower who received a loan against property did not use the disbursed funds for a long time. If the lender specified a time period to use their disbursed loan, he/she will re-evaluate one’s loan application. One must pay a specific fee for this process which is referred to as a re-appraisal fee.
The period for re-evaluation might vary between banks/NBFCs. Usually, lenders wait for at least 6 months for borrowers to use the disbursed amount. If they don’t, lenders will start re-evaluating one’s loan application.
When a person’s LAP application receives a mechanical stamp, confirming that he/she has done the stamp duty payment, it is called franking. Lenders or authorised agency of the government carries out this process on loan against property application.
However, franking charges for property loans are not mandatory in all states of India. Applicants in Maharashtra and Karnataka must pay these charges while applying for home loans as well.
Loan rescheduling charges
Often, borrowers have to pay huge EMI for property loans with a short tenure. Some borrowers offer the option to such borrowers to extend their loan tenure. This helps lessen their EMI burden. This extension of loan tenure is referred to as loan rescheduling. This attracts additional charges which vary between lenders.
There are several other additional fees and charges on loans against property besides the above ten. These charges might vary among lenders; therefore, an applicant must check and compare these charges before applying for a loan against property.