Loan against property

Borrowing against something you already own

A loan against property is a secured loan where you mortgage a property you own — residential, commercial or in some cases industrial — and use the money for almost any legitimate purpose. The property continues to be yours, you continue to live in it or let it, and the lender holds a charge until the loan is repaid.

The reason it matters is arithmetic. Because the lender holds tangible security, LAP is priced well below unsecured business borrowing and runs for far longer. On a substantial requirement over several years, that difference compounds into a very large number. A business owner choosing an unsecured loan over a LAP purely to avoid paperwork frequently pays for that convenience many times over.

The honest counterweight is that the asset is genuinely at risk. This is not a technicality. If the business fails and the loan is not serviced, the lender can enforce the security, and the property that was your family's safety net goes with the business. That is the trade you are making, and it deserves a clear head rather than an optimistic projection.

How much you can borrow

Two constraints apply, and your sanction is the lower of them.

The property constraint. Lenders advance a proportion of the assessed market value, determined by their own empanelled valuer rather than by your estimate or the circle rate. The proportion is highest for residential property and steps down for commercial and industrial. The valuer's figure frequently comes in below what owners expect, particularly where the property is in an older building, has irregular approvals or sits in a location with thin transaction evidence.

The income constraint. Separately, the lender tests whether you can service the instalment. For salaried applicants this is usually expressed as a fixed obligation to income ratio — all EMIs including the new one, as a proportion of net income. For businesses it is assessed from financials and banking, with existing obligations netted off. A property worth several crore does not by itself qualify you for a large loan if the cash flow to service it is not evident.

Model the instalment before you commit, using our loan calculators. If you are being offered a drop-line overdraft structure rather than a term loan, the DLOD calculator compares the two over the full tenure and shows what the reducing limit actually costs you.

Term loan or drop-line overdraft?

LAP is offered in two shapes and the difference is substantial for a business borrower.

A term loan disburses the full amount and you repay a fixed equated instalment. Simple, predictable, and interest accrues on the whole outstanding whether or not you need the money that month.

A drop-line overdraft gives you a limit that reduces on a schedule. You draw what you need, repay when you can, and interest is charged only on the daily outstanding. For a business with lumpy cash flow — seasonal receipts, project-based billing — this can cost meaningfully less in real interest, because idle money costs nothing. The trade-off is discipline: the limit drops whether or not you have repaid, and a borrower who stays fully drawn gets the worst of both.

Documentation and timeline

The honest expectation on timing is that LAP is slower than unsecured lending, and almost all of the delay sits in title and valuation rather than in credit assessment. A property with a clean, unbroken title chain and current approvals moves quickly. One with a gap in the chain, an unapproved addition, a pending khata transfer or an unreleased earlier mortgage can take weeks longer, and no amount of following up with the lender accelerates a legal opinion that is waiting on a document.

If you know you will need a LAP within the year, get the property papers in order now — obtain the encumbrance certificate, complete any pending khata transfer, and confirm that a previously repaid loan has been formally released. That preparation is worth more than choosing a different lender.

Interest, charges and the tax question

Floating-rate loans to individual borrowers are linked to an external benchmark, in practice the repo rate, plus a spread reflecting your profile, the property type and the loan-to-value. The spread is negotiable; the benchmark is not.

Beyond interest, price these: processing fee, legal and valuation charges, stamp duty on the mortgage deed which varies by state and can be substantial, documentation charges, and prepayment or foreclosure charges. On foreclosure, the position depends on the borrower and the purpose — regulatory restrictions apply to foreclosure charges on floating rate loans to individual borrowers in defined circumstances, and the treatment of business-purpose loans differs. Ask the lender to state the position in the sanction letter rather than assuming it.

On tax, the answer depends entirely on what you do with the money, and this is where borrowers most often assume wrongly:

• Where the funds are used for business purposes, the interest is generally allowable as a business expense under Section 37(1).
• Where the funds are used to acquire or construct another residential property, interest may be claimed under Section 24(b), subject to that section's limits and conditions.
• Where the funds are used for personal purposes — a wedding, a holiday, consolidating personal debt — there is generally no deduction at all, unlike a home loan taken to buy the house itself.

Keep clear evidence of end use from the outset, because the deduction rests on it. Confirm your position with your chartered accountant before relying on it.

When LAP is the wrong answer

• The need is recurring, not one-off. Funding stock and receivables with a term loan means repaying in instalments while the gap persists. A working capital limit is the correct instrument.
• The requirement is small and short. Stamp duty, legal and valuation charges on a modest, twelve-month need can outweigh the interest saved against unsecured borrowing.
• The business is already under stress. Mortgaging the family home to fund losses converts a business problem into a family one. This is the situation in which to take advice from someone with no interest in the transaction closing.
• Title is genuinely unclear. If the chain has gaps or the property is subject to dispute, pursue a LAP application only after fixing the title, not in parallel with it.

How Rytvae helps

We assess whether LAP is the right structure at all, prepare the property and income file so legal and valuation clear in one pass, and place it through our lending partners. Run your figures first through the business loan analyzer or model the structure with the DLOD calculator. See also unsecured business loans, working capital loans and construction finance.

Frequently asked questions