Having your own property is not just a smart investment that yields capital appreciation and returns in the long term; it can also be used as collateral for a loan against property.
However, the interest rate you will be charged for this loan will depend on certain factors. Read on to learn about these factors and how to get a loan at an optimal interest rate.
Credit Score
Your credit score or ability to repay a loan is one of the important considerations for determining your interest rates. It is also known as the CIBIL score. Financial institutions use this as a filtering tool to accept a loan application.
Repaying your loans, including Credit Card debt, on time will ensure a higher credit score. It can also give you the lowest interest rate on loan against property. However, any loan defaults will lower your credit score. Banks will then charge you higher interest rates.
Thus, monitor your credit score and ensure you report any errors to CIBIL immediately.
Loan Tenure
Generally, long-term loan interest rates are lower than short-term loans. So if you avail a loan with a 15 to 20-year tenure, you can get the lowest interest rate on loan against property.
Remember that while you might have been offered a lower interest rate for a long-term loan, your total interest pay-out would be greater than what you pay for a short-term loan.
Closing a loan before its tenure is prepayment will save you money on the total interest pay-out.
Property Location
A loan against property for projects by reputed builders at high-demand locations will likely be offered at a lower interest rate than properties on the city’s outskirts. Such loans have a higher chance of approval.
Banks and other financial institutions consider properties within the city limits less risky since they have a high resale value.
Financial Profile
Your financial profile also affects the loan against property interest rates. The following comprise your financial profile:
- Age – If you are about to retire, chances of rejection are higher. Even if the loan is approved, the interest rate will be high and the tenure low.
- Employment status – Your employment status also determines your eligibility for a loan. Lenders might hesitate to give you a loan if you are a frequent job changer, NRI working on a contract, etc., since you don’t have a stable job or income. The chances of not being able to repay the loan get higher.
- Source of Income – It is taken into consideration for loan eligibility. If you are in the high-income bracket, the bank may charge you a lower interest rate since the risk of non-payment is lower. The bank will look at your ITR statements to check whether you are self-employed or in service. It will help them decide whether you should be granted a loan.
- Type of residence – Loan against residential property takes less processing time than commercial property. In commercial property, one who doesn’t belong to an investor and has clear ownership is desired.
Property Title
A loan against property is provided at preferential interest rates if the title to the property is clear.
Some properties have defective titles as they are involved in some litigation. Properties that don’t have a clear title are either rejected for loan purposes or given a loan at very high-interest rates.
Commercial properties with a clear title are offered loans at affordable rates since they have a higher market value. Reselling such property is also easier and has low credit risk for the lender since the property can be resold if the borrower defaults on payment.
Residential properties by reputed developers with a clear title are more likely to get better-paying loans.
Conclusion
Getting a favourable interest rate for your loan against property is easier than you think, but you must consider the factors discussed in this article.
You can obtain the best deals for a loan against property from reputed housing finance companies like PNB Housing Finance Ltd and leverage your existing property for your next real estate investment!
