Have you rented out a property? You can borrow a loan against it

Any financial planner today will tell their clients that if they really wish to make a good investment, they must buy property. Owned property can even pay for its upkeep when you lease it out. If you need money quickly, you can borrow a loan on the property or even sell it (depending on the need and immediacy of requirement).

If you have rented out your property, you can still raise a loan against it. This is known as the ‘Lease rental discounting’ loan and it is offered by the most reputed banks and financial institutions in India. It is calculated and approved on the basis of the rent potential and the current market value of the property.

How lease rental discounting works

The most dominant aspects of this kind of loan are:

• The loan amount takes into account the current rent being collected on the property, as well as the future rent receivables on it.
  
  
• This loan would traditionally be taken by businesses or sole proprietorships that owned commercial properties. Today, reputed lending institutions offer this loan against residential properties as well.
  
  
• The property’s rent potential and the applicant’s eligibility and repayment capacity determine the loan amount.
  
  
• Factors that determine the loan amount include the property’s rent potential, the locality where the property is located, its market value, duration of the current lease (it should be leased out for at least six months before applying for the loan), the owner’s credit history, repayment capability and the property documents.
  
  
• Compulsory documents for the lease rental discounting loan include: registered lease rental agreement, share certificates issued by the building society, and monthly rent receipts.
  
  
• The loan amount is calculated on the discounted value of the rent received.

Once the lease rental discounting loan is approved, the lending institution opens an escrow account. Once the loan is disbursed, the rent is no longer paid directly to the owner of the property – the renter pays the rent into the escrow account. The property owner does not receive the rent on the property till such time that the loan is repaid to the lender. The property cannot be sold till the loan is repaid, and the lender must be notified if the current renter leaves the property.

Mortgage loans – What they are, what they do

As a rule, most people steer clear of taking loans. Admittedly, taking a loan is a huge responsibility – you must be sure to make regular repayments and juggle your other finances for years. But there comes a time when taking a loan becomes a necessity. One may be in urgent need of money for a personal or professional need. It is not always possible to raise money from private sources.

Hence, it is feasible to take a loan from a reputed financial institution. You may choose to take a personal loan, or you may leverage your owned property by taking a loan against it. This option is known as a mortgage loan.

You can pledge your owned residential or commercial property to get a mortgage loan. These loans are more affordable than personal loans, since they are secured loan products. The best financial institutions in India offer quick, hassle free mortgage loans at good rates of interest as well.

Why consider a mortgage loan?

Mortgage loans are computed up to 70% of the property’s market value at the time of application. Such as is done with home purchase loans, the property and the applicant’s credentials are thoroughly vetted before the approval is granted. The paperwork for the loan is straightforward and hassle free. The lender issues a list of documents required to be submitted with the application form – these include the applicant’s antecedents, monthly income, credit history, property papers, etc. Like with home loans, the borrowed sum is paid back via EMIs.

Mortgage loans are more affordable than personal loans, but slightly more expensive than home purchase loans. The home loan rates are normally in the range of 9% to 10.5% (these have reduced after demonetisation across banks and financial institutions), while mortgage loans may have interest rates of 12% and higher. However, lending institutions are more amenable about granting mortgage loans, since the property credentials have already been established. Thus, the turnaround time from application to disbursal is lower as compared to other loans.

The applicant is also likely to get a higher loan amount when applying for a mortgage loan. Make sure to use a loan EMI calculator to get an approximation of how expensive the EMI will be. When taking the loan, you must check for the interest rate being offered, the lender’s repayment terms (if foreclosure fees are charged, for instance), processing charges, etc. 

Understanding home loan eligibility

In an increasingly uncertain and financially strapped environment, it is understandable that most people yearn for stability. And the highest symbol of stability is owning a home.

However, buying one’s own home remains a pipe dream for many people. The real estate market is certainly sluggish and looking for customers, but prices are still out of the reach of most first time home buyers. Those who are willing to accumulate their finances and take the plunge are the ones who are scouting for suitable home loans.

But there are many misconceptions related to taking home loans. For one thing, many loan applicants mistakenly believe that they can get a large loan amount if they make a good living. While this may be true to an extent, there is an important element called ‘home loan eligibility’ that is determined by a mix of other factors.

What is home loan eligibility?

Simply put, it is the loan amount one may reasonably expect to get basis their current income, credit history, loan tenure and the rate of interest being sought. When insurers check the applicant’s income, they deduct such categories as LTA (Leave Travel Allowance) and Medical Allowance, and focus on the Basic component of the salary. Hence, if a person’s annual CTC pay is Rs 10,00,000, the insurer will compute the eligibility after deducting the LTA and Medical Allowance, and not on the entire Rs 10,00,000.

You should use a home loan eligibility calculator to find your home loan eligibility. It computes the eligibility basis your age (a lower age = more income earning years, hence a longer loan tenure), current income, any other existing loans, and interest chargeable by the particular financial institution.

Eligibility and home loan calculations

The eligibility is often the first step in the home loan amount calculations. Normally, lending institutions in India may grant a loan amount up to 60 times of the applicant’s net income. Once the paperwork is processed and the property is approved for purchase by the lending institution, the loan amount is disbursed. The home loan EMI is calculated on the basis of the rate of interest, tenure and overall loan amount.

Factors affecting eligibility

Your eligibility is reduced if you have:

• A history of loan defaults
• Multiple unpaid loans – the more loans you have, the lower is your monthly repayment capacity
• Poor credit score
• Lower income than required to get a certain loan amount