When you take a Loan Against Property (LAP), the lender may create a charge on your property as security. This is a legal arrangement that ensures the lender has a right over the property, which they can enforce if you fail to repay the loan. Understanding how this charge works is crucial for borrowers, as it impacts their rights and obligations during the loan tenure.
Understanding the Basics of Loan Against Property
A Loan Against Property is a secured loan where you use your property as collateral to secure a loan from a lender. The loan amount is usually determined based on the market value of the property and the lender’s policies. The most common types of properties used for LAP include residential or commercial real estate.
What is a Charge Created on Collateral Property?
A “charge” created on collateral property refers to the legal right that the lender obtains over the property used to secure the loan. It acts as a form of guarantee for the lender, ensuring that if you default on the loan, they have the legal authority to seize and sell the property to recover the outstanding loan amount.
This charge does not affect your ownership of the property, but it restricts your ability to freely transfer, sell, or further mortgage it without the lender’s permission.
How is a Charge Created on the Property?
The process of creating a charge on the property typically involves the borrower mortgaging the property. The most common methods are:
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Equitable Mortgage
This involves handing over the original title deeds to the lender. The lender holds the deeds as a form of security but the borrower remains in possession of the property.
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Registered Mortgage
This is a more formal process where the mortgage is recorded with the local sub-registrar. It’s more binding and gives the lender stronger legal rights.
For companies taking out a LAP, the details of the charge must be registered with the Registrar of Companies (ROC) as per the Companies Act. This ensures the charge becomes a public record.
What Does a Charge Mean for the Borrower?
When a charge is created on the property, it means that the borrower’s ability to deal with the property is restricted. These restrictions include:
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Selling or Transferring
You cannot sell, gift, or transfer the property to someone else without the lender’s consent while the charge is in place
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Further Mortgaging
You cannot create another mortgage or charge on the same property unless the lender agrees
If you default on the loan repayment, the lender has the right to take possession of the property and sell it to recover the dues, as per the terms outlined in the loan agreement.
What Happens When the Loan is Fully Repaid?
Upon full repayment, the lender issues a No Objection Certificate (NOC) and returns your original title deeds, formally releasing the property charge. You regain absolute ownership and the right to sell or mortgage the asset without lender consent.
If you aren’t ready for full repayment but seek a lower loan against property balance transfer interest rate, a balance transfer loan against property is a strategic way to reduce costs while the charge simply transitions to a new lender.
Charge Created on Collateral Property Under Loan Against Property Balance Transfer
In some cases, borrowers may opt for a balance transfer to take advantage of better interest rates or improved loan terms. When you transfer the balance of your existing LAP to a new lender, the charge on the property is transferred as well.
However, during the transfer, the new lender may require a fresh charge to be created on the property. This means that the charge will remain on the property until the new loan is repaid in full. It is important to be aware of the interest rate for loan against property balance transfer, which may differ from the original loan. Borrowers should carefully compare the new interest rates and terms to ensure that the transfer is financially beneficial.
Conclusion
Understanding the charge created on collateral is essential for managing a Loan Against Property effectively. While this legal claim secures the lender’s interest and temporarily restricts your property rights, it does not diminish your long-term ownership.
For those seeking more favorable terms, a balance transfer on loan against property is an excellent way to optimise your debt and lower your interest burden. By staying informed about how these charges shift between lenders, you can make smarter financial moves and ensure your property remains a powerful tool for your financial future.
