An Overdraft (OD) facility against property mortgage, also known as a Loan Against Property (LAP) Overdraft, allows you to borrow funds against the value of your property with the added flexibility of withdrawing money as needed, similar to a credit line. You can withdraw and repay funds multiple times, and you are charged interest only on the amount utilized, not on the entire sanctioned amount.
Here’s how to avail the Overdraft facility against a property mortgage:
1. Eligibility Criteria
- Ownership of Property: You must own a property (residential, commercial, or land) that can be mortgaged. The property should have clear title ownership and be free of any legal disputes.
- Age: Typically, lenders prefer applicants between 21 to 65 years. The maximum age at loan maturity usually does not exceed 70 years.
- Income Proof: Salaried individuals, self-employed professionals, and business owners are eligible, provided they meet the income criteria. You’ll need to show consistent income proof to demonstrate repayment capacity.
- Credit Score: A good credit score (usually above 700) is preferred, though some Non-Banking Financial Companies (NBFCs) might offer flexibility with lower scores.
- Loan-to-Value Ratio (LTV): Typically, lenders provide an overdraft facility against 50-70% of the market value of your property.
2. Types of Properties Eligible
- Residential Property: Flats, houses, or plots that are legally owned and free of any disputes.
- Commercial Property: Office spaces, retail shops, or business premises.
- Land: Some lenders also allow mortgaging of vacant land (within certain limitations).
3. Step-by-Step Process to Avail the Overdraft Facility
Step 1: Check Eligibility and Select Lender
- Research Lenders: Choose between banks or NBFCs based on their interest rates, terms, and facilities offered. Many financial institutions now offer overdraft facilities against property, so compare the following factors:
- Interest rates (fixed or floating)
- Processing fees
- Loan-to-Value (LTV) ratio
- Repayment terms
- Eligibility Check: Ensure you meet the lender’s eligibility criteria in terms of income, property ownership, credit score, and repayment capacity.
Step 2: Prepare Documentation
- You will need to submit several documents to initiate the process:
- Identity Proof: Aadhaar card, PAN card, passport, voter ID, etc.
- Address Proof: Utility bills, rental agreement, passport, etc.
- Income Proof:
- Salaried individuals: Salary slips for the last 3-6 months, Form 16, bank statements showing salary credits, and income tax returns (ITRs).
- Self-employed individuals: ITRs for the last 2-3 years, profit and loss statements, and balance sheets (preferably audited by a CA), and business bank statements for 6-12 months.
- Property Documents:
- Title deed or sale deed proving ownership
- Encumbrance certificate (indicating the property is free of any legal liabilities)
- Property tax receipts and No Objection Certificate (NOC) from relevant authorities
- Approved building plan and occupancy certificate (if applicable)
- Other Documents: Proof of other existing loans, if any.
Step 3: Apply for the Overdraft Facility
- Submit an Application: Visit the bank’s or lender’s branch or apply online (if available). Submit the application form and required documents. Make sure to specify that you’re opting for the overdraft option, not a standard loan.
- Property Valuation: The lender will conduct a property valuation through their authorized valuer to determine the current market value. This valuation will determine the maximum overdraft limit you can avail of.
Step 4: Approval Process
- Credit Assessment: The lender will review your creditworthiness by assessing your credit score, income proof, and repayment capacity.
- Sanctioning of Overdraft Limit: Based on the property value, your credit history, and income, the lender will approve a maximum overdraft limit, typically 50%-70% of the property’s market value.
- Agreement Signing: Once the overdraft limit is sanctioned, you will need to sign the loan agreement and mortgage agreement with the lender, finalizing the terms of the facility.
Step 5: Overdraft Account Activation
- Overdraft Account: Once approved, the lender will open a dedicated overdraft account linked to your property mortgage. You can access this account to withdraw funds as needed, up to the approved limit.
- Interest Charges: You will be charged interest only on the amount you withdraw, not on the full overdraft limit. The interest is calculated daily and debited from the account monthly.
Step 6: Utilizing and Repaying the Overdraft
- Withdraw Funds: You can withdraw funds from the overdraft account when required, using online banking, cheques, or visiting the branch. The flexibility of withdrawing funds multiple times is one of the key benefits of this facility.
- Interest Repayment: You only need to pay interest on the amount utilized from the overdraft. For example, if you have a ₹20 lakh overdraft limit but have only used ₹5 lakh, you will be charged interest on ₹5 lakh, not the full ₹20 lakh.
- Principal Repayment: You can repay the principal in part or full at any time, reducing your interest burden.
4. Key Benefits of an Overdraft Facility Against Property
- Pay Interest Only on the Utilized Amount: You’re not required to pay interest on the full loan amount. Interest is only charged on the amount you have actually withdrawn.
- Flexibility: The overdraft facility offers the flexibility to withdraw funds as and when needed, making it ideal for managing cash flow, business expenses, or personal needs.
- No Fixed EMIs: Unlike a regular LAP, there are no fixed EMIs. You repay based on how much you’ve utilized and can make principal payments at your convenience.
- Revolving Credit: The overdraft limit can be used, repaid, and reused multiple times throughout the tenure of the loan, similar to a revolving credit facility.
- No Prepayment Penalties: Most overdraft facilities don’t have prepayment penalties, meaning you can repay the outstanding amount at any time without additional charges.
5. Points to Consider
- Higher Interest Rates: While the interest is charged only on the utilized amount, interest rates on overdrafts tend to be slightly higher compared to traditional LAP interest rates.
- Regular Monitoring: Since this is a revolving credit facility, lenders may regularly monitor your account to ensure the property’s value and your financial status remain stable.
- Documentation and Processing Fees: The processing fees and documentation requirements may be slightly higher than a traditional loan due to the flexibility and structure of the overdraft facility.
6. Who Should Opt for an Overdraft Facility Against Property?
- Business Owners and Self-Employed Professionals: This facility is highly beneficial for business owners and self-employed individuals who have fluctuating income and need access to liquidity for business expansion, working capital, or other business expenses.
- Individuals Needing Flexible Funds: Those who anticipate a need for funds over time but don’t want to borrow a lump sum all at once can use an overdraft to manage personal expenses, education, medical needs, or emergencies.
Conclusion:
Availing an overdraft facility against a property mortgage is a great option if you need flexibility in borrowing and repayment. It provides access to a large sum of money over time while allowing you to pay interest only on the amount used. To successfully avail this facility, ensure you meet the lender’s eligibility criteria, have the necessary documents in place, and understand the interest rates and fees involved. Choosing between a bank or NBFC depends on your financial situation, but most large banks and NBFCs offer this facility with varying terms and conditions.