A loan against property (LAP) can be a powerful financial tool to access funds for business expansion, education, or emergencies. Since it’s a secured loan, your property—residential, commercial, or industrial—acts as collateral. While this often results in lower LAP interest rates compared to unsecured loans, the borrower’s responsibility to make timely repayments becomes crucial. Defaulting on a mortgage loan can have serious financial and legal implications.

Let’s explore what happens if you default on a loan against property, the process that follows, and how you can safeguard your assets.

1. Understanding Loan Against Property (LAP)

A loan against property is a type of mortgage loan where borrowers pledge their property to obtain funds from a lender. The loan amount depends on factors such as:

• The market value of the property

• The borrower’s income and credit profile

• Loan tenure and repayment capacity

The property remains in the borrower’s possession during the loan tenure, but the lender holds the right to take legal action if the borrower defaults on repayment.

2. What Constitutes a Loan Default?

A default occurs when a borrower fails to pay EMIs (Equated Monthly Instalments) as per the agreed schedule. There are two types of defaults:

• Minor Default: Missing one or two EMI payments due to temporary financial difficulties.

• Major Default: Continuous non-payment of EMIs for three months or more, which is treated as a serious default by lenders.

Lenders usually send reminders, emails, and notices before categorising the account as a Non-Performing Asset (NPA).

3. The Consequences of Defaulting on a Loan Against Property

Defaulting on a mortgage loan can lead to several financial and legal repercussions. Here’s what typically happens:

a. Penalty and Late Payment Charges

The first consequence of missing an EMI is the imposition of late payment charges. These can range from 2% to 3% of the overdue amount. Even a single missed payment can impact your repayment history, increasing your overall financial burden.

b. Increased Interest and Reduced Creditworthiness

If defaults continue, the lender may increase your loan interest rates due to higher perceived risk. Furthermore, your credit score takes a major hit, making it difficult to obtain future loans or credit cards. A lower credit score signals to lenders that you are a high-risk borrower.

c. Account Classification as Non-Performing Asset (NPA)

After 90 days of non-payment, lenders usually classify your mortgage loan as a Non-Performing Asset. This means the loan is officially considered at risk, and the lender may initiate recovery proceedings under the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act), 2002.

d. Legal Notices and Recovery Action

Once your account becomes an NPA, the lender will issue a 60-day legal notice demanding repayment. If the borrower fails to clear dues or come to a settlement within this period, the lender gains the right to take possession of the mortgaged property.

e. Property Possession and Auction

If repayment is not made even after receiving the final notice, the lender can seize the property and proceed with a public auction or sale. The proceeds from the sale are used to recover the outstanding amount. Any remaining balance after settling the dues may be returned to the borrower.

f. Emotional and Reputational Impact

Losing one’s property is not just a financial loss but also an emotional setback. Additionally, defaults are recorded in credit bureaus, which can damage your financial reputation and affect your future borrowing capability.

4. Can You Still Save Your Property After Default?

Yes, there are several ways to manage a default before it escalates to property seizure.

a. Communicate with the Lender

As soon as you anticipate difficulty in paying your EMIs, contact your lender. Transparent communication can help you negotiate alternative repayment arrangements, such as extended tenure or temporary EMI moratoriums.

b. Loan Restructuring

Lenders may offer to restructure your mortgage loan—for example, by increasing the loan tenure or reducing monthly installments—to make repayment more manageable.

c. Partial Payment Settlement

If you have temporary cash flow issues, you can request to make partial payments until your financial condition stabilises. Many lenders prefer cooperation over legal proceedings.

d. Refinancing the Loan

You can also consider transferring your loan against property to another lender offering lower loan interest rates or better repayment terms. This can reduce your financial stress and help you avoid default.

5. Preventing Default: Smart Financial Practices

Preventing a default is always better than dealing with its consequences. Here are a few steps to stay on top of your repayments:

• Plan EMI payments wisely: Choose a repayment tenure that aligns with your income stability.

• Maintain an emergency fund: Keep funds equivalent to 3–6 months of EMIs for unforeseen situations.

• Track your payments: Automate EMI payments to avoid missing due dates.

• Monitor lap interest rates: Keep an eye on market rates and consider refinancing when it benefits you.

• Review financial commitments regularly: Avoid over-leveraging by taking multiple loans simultaneously.
  
  

6. Role of Credit Score in Loan Defaults

A good credit score is essential for accessing loans at favourable LAP interest rates. Defaults, even temporary ones, negatively impact your credit history. Rebuilding your credit score after a default takes time, as it requires consistent repayment behaviour and responsible credit management.

7. How Grihum Housing Finance Helps Borrowers Manage Defaults

Grihum Housing Finance understands that financial hardships can occur unexpectedly. The institution prioritises customer-centric policies and provides flexible repayment support in genuine cases of financial distress. Their representatives work closely with borrowers to explore viable solutions, such as:

• Loan restructuring or tenure extension

• Balance transfer at competitive LAP interest rates

• Counselling to manage repayment planning effectively

By focusing on long-term financial stability and transparent communication, Grihum Housing Finance ensures that borrowers have multiple opportunities to safeguard their property before legal measures are taken.

Conclusion

Defaulting on a loan against property can lead to significant financial and emotional consequences, from penalties and credit score drops to property auctions. However, early communication, timely restructuring, and financial discipline can help prevent or manage defaults effectively.

Grihum Housing Finance aims to empower borrowers with flexible mortgage loan solutions and responsible lending practices. By maintaining clear communication and timely repayments, borrowers can not only protect their property but also build a stronger financial future with confidence.