Taking a loan against property (LAP) is a popular financing option for many borrowers in India. It allows you to access funds at competitive interest rates by pledging your residential or commercial property as collateral to the lender. Many borrowers choose LAPs due to their relatively straightforward documentation requirements, flexible tenure options, and higher loan amounts compared to unsecured loans.
As financial markets evolve and your personal financial situation changes, you may consider transferring your existing LAP from one lender to another to benefit from more favourable interest rates and terms. This process, known as a balance transfer, can potentially generate significant savings over the loan tenure. However, before initiating a balance transfer, it is essential to understand all associated costs to determine whether the switch will genuinely provide financial benefits. This article will explain the various charges involved in LAP balance transfers in India to help you make an informed decision.
Processing and Administration Fees
Financial institutions typically charge a one-time processing fee to evaluate your new loan application, including factors like your property valuation, income eligibility, creditworthiness, and other relevant credentials. The processing fee generally ranges from 0.5% to 2% of the loan amount plus applicable taxes, varying based on the lender's policies and the borrower's profile.
Some lenders may offer promotional waivers or reductions on processing fees to attract balance transfer customers. Additionally, administrative and documentation charges for sanctioning and disbursing the new LAP may apply, typically ranging from ₹2,000 to ₹5,000, depending on the loan amount and lender. These fees are often negotiable, particularly for high-value loans or borrowers with excellent credit profiles.
Pre-Payment and Foreclosure Charges
When you transfer your existing LAP, you need to foreclose that loan account by paying it off in full before the new lender disburses funds against your property. Most institutions charge prepayment penalties of 2%-5%* on the outstanding principal if you foreclose the loan within 1-5 years of availing it. This charge compensates the lender for potential losses from interest income. Some non-banking financial companies (NBFCs) may charge higher foreclosure fees, so check your loan agreement carefully before initiating the transfer process.
Property Valuation and Legal Verification Costs
The new lender financing your balance transfer will conduct their independent valuation of your property to ascertain its correct market value before disbursing the loan amount. The borrower typically bears this valuation fee, and its costs depend upon factors like property location, type, size, etc. In addition, charges will also apply to obtain a legal opinion on the property documents as part of the due diligence process. As the borrower, you typically bear this valuation fee, which varies based on property location, type, size, and complexity of assessment:
● Metropolitan cities: ₹3,000-₹8,000
● Tier II cities: ₹2,500-₹6,000
● Rural areas: ₹2,000-₹5,000
For premium properties or commercial establishments, these costs may be higher.
Stamp Duty and Other Statutory Charges
When you transfer your loan against property, the lending institution registers a new charge on your property by paying the applicable stamp duty. This stamp duty is usually passed on to the borrower, and its percentage differs across states, typically ranging from 1% to 5% of your total loan amount. Other statutory taxes and charges, like registration fees, legal charges, etc., will also apply as per the state laws.
Switching and Balance Transfer Fees
Some lenders impose specific balance transfer fees to process LAP transfer applications, which are separate from standard processing and documentation charges. These fees typically range from 0.25% to 1% of the loan amount plus applicable taxes. However, this is an area where significant variations exist between lenders, and many institutions waive these charges during promotional periods to attract new customers.
It's advisable to compare this charge across multiple lenders and negotiate for its reduction or waiver, especially for high-value LAPs. Selecting a lender with minimal or no explicit transfer fees can result in substantial savings.
Interest Rate Differentials
When initiating a transfer to capitalise on lower interest rates, make sure to account for any differences in base rates as well as the applicable spread or margin charged above that base rate. A new lender may offer lower interest rates but make up for this difference by charging a higher margin above their benchmark rate, effectively making the final interest rate higher than your existing LAP. Calculate the total effective interest rate after factoring in relevant charges to ascertain actual savings.
Part Pre-Payment of Existing Loan
As an alternative to a full transfer, you can also make a large part-prepayment of up to 25% of your outstanding loan amount every financial year without attracting any penalties. This allows you to reduce your interest outgo substantially while avoiding hefty foreclosure and transfer charges. Depending upon your original loan amount, tenure, and interest rates, this part-prepayment can lead to significant savings over time.
To Conclude
Loan against property balance transfers allow borrowers to access better pricing, but one must evaluate various components of the total costs involved before making a decision. Careful calculations of various charges highlighted above – processing fees, prepayment penalties, property valuation charges, stamp duties, and interest differentials will clarify the savings potential. Avoid transfers where additional costs outweigh the likely savings - in some cases, continuing your loan as-is or making part pre-payments may be better options. Transferring your existing Loan Against Property (LAP) to a financial institution like Shriram Finance can offer you the flexibility to adjust your repayment tenure as well as potentially access additional funds as your requirements change. As always, choose your new lender carefully by comparing offerings across public, private and NBFCs before initiating a switch.
