Things To Know Before Taking A Loan Against Property
If you are looking for a loan against a property that you have built over a lifetime for your children or for other things in your retirement years, here are things you should keep in mind
A house is one asset that you can pledge as a collateral to secure funds as a loan in your hour of need in your retirement years. It is a secured loan known as loan against property and can be taken against a residential house, commercial property or even land that you own. One benefit that you will have as a borrower in this type of loan is that you will remain the rightful owner of the property even while servicing the loan.
Typically, you can take a loan of up to Rs 5 crore against your house. For instance, the State Bank of India offers a loan against property in the range of Rs 10 lakh to Rs 5 crore where the loan to value (LTV) ratio could be 65 per cent for loans below Rs 1 crore, and 60 per cent for loans in the Rs 1 crore-5 crore range.
Nevertheless, here are a few things you should keep in mind before taking a loan against property.
Interest Rates: This is the first thing you should consider before taking a loan against property. The rate of interest could differ on various factors, such as your income, any existing debt, credit history, type of property, etc.
Since a loan against property is generally taken for the long term, even a small percentage difference could make a big difference in cost. For Instance, HDFC Bank charges 3-4.50 per cent above the policy repo rate, which at present, is 6.50 per cent. So the rate of interest, in this case, would be in the range of 9.50-11 per cent.
On the other hand, SBI links its interest rate with the MCLR and charges 1.60 per cent above the MCLR rate for a loan of up to Rs. 1 crore. For loans between Rs 2 crore and Rs crore, the rate is 2.50 per cent above MCLR, according to the SBI website.
Thus, you need to compare the rate of interest before finalising on the deal most suitable for you.
Tenure Of Loan: The tenure is usually for a period of up to 15 years, but some lenders may offer it for up to 20 years. Note that long tenure means lower equated monthly instalments (EMIs) but more interest, while short term means a higher EMI.
Hence, one should choose a tenure based on one’s payback capacity while keeping in mind the interest amount so that one doesn’t feel burdened.
Processing Fees And Other Charges: Similar to interest rates, processing fees also may differ from one lender to another. For instance, HDFC Bank charges a minimum of Rs 7,500 and a maximum of 1 per cent of the loan amount, and Tata Capital charges 1 per cent of the finance amount plus Goods and Services Tax (GST) for residential and commercial properties, and 1.25 per cent plus GST for all other properties as processing fees.
The processing fee also differs with the property. Besides, lenders may charge you for prepayment or have limitations on the number of prepayments while levying other charges. Therefore, it is better to take into account all these charges while taking a loan against property.
Ownership Of Property: In case of a loan against property, the ownership remains with the owner. The property is pledged with the lender as a collateral until the borrower repays the loan amount in full.
If the property has more than one owner, then it is important that all co-owners agree to be the joint borrowers of the property.
Property Valuation: When you explore taking a loan against property, the lender will assess your property’s market value and accordingly offer you the loan amount. Some lenders may also offer you a lower valuation, and so, the best way out is to do some research and find out the valuation of your property.
As a borrower, it is also important to ensure that the valuation is fair, as the loan amount will be decided on the basis of this valuation.
Also understand that it is crucial that you take the loan only for the amount you need even if you are eligible for a higher amount. In case of a default, you could even end up losing the property to the lender. Thus, it is very important that you determine your actual requirement and repayment plan before applying for the loan to avoid any unnecessary financial burden.
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