Top 10 Factors Affecting Your Loan Against Property Interest Rates

A Loan Against Property or LAP is a secured loan that allows you to fund your various needs by keeping your property as a collateral. Whether you are planning to expand your business, looking for funds for paying medical bills or to manage your unforeseen expenses, a loan against your residential, commercial or industrial property can be a great choice. However, the interest rate you receive for a Loan Against Property is affected by several factors. In this blog, let us understand and learn about the factors that affect the interest rate against your property. Read on!

Factors Affecting Your Loan Against Property Interest Rate

1. Age

Age is an important factor while determining the interest rate for loan against your property. Here is how it can impact on your eligibility:

Age Limit: Lenders usually have a age criteria for the applicants and you must qualify for that. Typically, your age needs to be between 18 at the time of application and 60 at the time of maturity of loan. However, this age criteria vary from lender to lender. So, you must check the age eligibility criteria carefully before applying.

Repayment Capacity: Financial institutions access your ability to repay the loan based on your age. If you are about to retire from your job, then the lender will consider your post-retirement income for loan repayment.
 

2. Lender-borrower Relationship

Even in the digital age, your relationship with the lender can play a critical role in your loan. The longer the relationship, the better the lender's understanding and trust you with the loan repayment. If you have a stronger relationship with your lender, it can lead to more favorable terms.

For example: If you have already taken credit with the lender and are paying your debts on time, you may be eligible for a lower interest rate. However, the lender may have relatively a stringent credit appraisal process that results in a higher interest rate for new customers.

3. Type of Property

The property you are willing to mortgage also has an impact on your interest rate. There are three different kinds of properties you can keep as a mortgage: commercial, residential and industrial. Commercial property can include office premises, retail space, warehouse etc.  Residential property can consist of houses, apartments, residential land and industrial property includes buildings, manufacturing plants, flex space, light assembly facilities, etc.

If a commercial property owned by you does not involve any investors, then you can expect a higher loan amount by keeping that property as security. This is because commercial properties are usually located in upscale areas. They also have higher resold value in the case of default. The lender takes low credit risk by approving the loan on such properties.

On the other hand, a residential property may have an advantage. The lender may prefer keeping your residential property as a collateral as a residential property is easier to liquidate and the value of these properties does not fall over time.

However, keeping your industrial property as a collateral can be highly beneficial. The industrial properties are often valued high, enabling you to secure a larger loan amount when compared to any other property. Due to the higher value and less risk associated with these properties, lenders often offer a lower interest rate making it more cost-effective over time.

Also Read - Different Types of Mortgage Loans in India

4. Location of the Property

The location of your property also plays an important role in securing a loan with a low interest rate. If your property is in a prime location with all the basic amenities within a one-kilometer radius, the lender will grant you a lower interest rate. Whereas if your property is outer or a bit far from the main city, the rates will be higher. Remember, location is vital in influencing your property's resale value. Properties with a higher resale value lower the lending risk significantly.

5. Loan Tenure

The repayment tenure is crucial in determining your Loan Against Property interest rate. Your Equated Monthly Instalment (EMI) comprises the principal outstanding, interest amount and tenure. The interest component makes up the majority of your instalment throughout the first few years of repayment. But, as time passes, you begin to pay more towards principal repayment. Let’s understand with an example:

Loan against property availed on March 2022

The table implies that if you choose a longer tenure, you will end up paying more in interest. While the shorter term may put a strain on your finances for a while, you will save a significant amount on the interest payable.

Let's look at another table to get a clear idea of this.

The difference in interest payable between the 5 and 15-year loan term is Rs. 23,20,714.

6. Loan Amount

The loan amount has a major impact on your loan interest rate. If you seek a larger loan amount or the lender grants you a high Loan-to-Value (LTV) ratio for LAP, they are likely to charge you a high-interest rate. This is because a higher loan amount entails higher credit risk and vice versa.

7. Type of Interest Rate

You can choose between a fixed and a fluctuating interest rate when applying for a Loan Against Property. The fixed interest rate is determined by the lender. On the other hand, floating rates are based on the RBI's benchmark and can increase based on the country’s economic conditions. While a floating interest rate starts lower than a fixed interest rate, they carry risk of increasing, which can make your EMIs higher, but it can also reduce your loan cost if the rate falls.

8. Your Income

Your income is also considered as an important factor that defines your loan interest rate. While applying for the loan you must qualify the lender’s eligibility criteria, one of that includes a certain amount of income. The lender evaluates your income to check your repayment capability to determine a loan interest rate. Having a stable source of income and employment history can increase your chances of qualifying low interest rate.

For example, if you have a stable job or income source the lender is at less risk when offering you a loan. On the other hand, if you keep on switching your job from time to time or have fluctuating income, the lender is at risk and as a result the interest rate offered by them will be higher than the one with a stable income.

In addition to that, the lender also considers your employer's credibility. Working for a start-up or a small business with an inconsistent salary qualifies you for a high-interest loan against property.

9. Credit Score

Credit score is the numerical representation of your creditworthiness and typically ranges from 300 to 900. When you apply for a loan, the lender performs a credit check on your profile to know your credit repayment capacity. Having a score of 750 and above is usually considered as a good score and majority of lenders consider it as an ideal score. This ideal score can help you get loans at an attractive interest rate. But if your score is below 750, it will be a bit challenging to avail of a loan with a good interest rate.

10. External Factors

External factors like the Reserve Bank of India's (RBI) monetary policy, the inflation rate, and the economic growth rate can also impact the interest rate. These factors are interrelated and can make borrowing more expensive when there are any changes in the economy.

If there is any rise in inflation, the RBI reconsiders its monetary policy. It raises the Cash Reserve Ratio (CRR) and the repo rate, making borrowing more expensive. The RBI takes this step to keep prices in check by restricting the cash flow in the economy.  

To Conclude

A lender has to consider your age, external factors, income, occupation, property type, etc. to offer you an interest rate against the loan amount you want to avail of. By focusing on the factors, such as age, type of property, tenure, loan amount, etc., you can improve your chances of securing a loan at a lower interest rate. However, if you are looking for a lender with simple eligibility criteria with minimal document requirement, you can visit Poonawalla Fincorp and enable your dreams.

Frequently Asked Questions

1. What is the maximum loan amount I can get with a Loan Against Property?

The maximum loan amount you can avail of with a Loan Against Property from Poonawalla Fincorp is ₹25Cr.

2. What is the lowest interest rate of a mortgage loan offered by Poonawalla Fincorp?

Poonawalla Fincorp offers an attractive interest rate for a loan against your property, starting at just 9.5%* per annum.

3. Can I get a lower interest rate with a high credit score?

Yes, if your credit score is 750 or above with a good credit history, you can negotiate with your lender for a lower interest rate.