A loan against property can be used for various financial requirements. It can assist you with anything, right from purchasing a new home to the establishment of a new business. However, it is essential to understand the factors determining the loan against property interest rate.
Other than your CIBIL score, here are some things that can impact the interest rate for a loan against property.
Age is vital for determining your loan tenure, amount, interest rate, and approval. You might expect a higher loan amount and a more extended repayment period if you are young. But, being young does not always imply a low-interest rate.
Lenders believe that you have only recently started working if you are very young. You have yet to establish a credit history and fully understand your financial responsibilities at this age. In such a case, the uncertainty of your financial behaviour can qualify you for a costly loan. Similarly, if you are a retiree, you may have to pay a high-interest rate due to poor earning potential in the future.
However, if you are between the ages of 30 and 35, you are more likely to have a solid financial history and a stable career. As such, the lender may grant you a low-interest loan.
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. The interesting thing is that all the external aspects influencing your loan against property interest rate are interlinked in some way.
If inflation rises, 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.
Simply put, if the economy suffers a setback, the cost of obtaining a loan against property rises.
Even in the digital age, your relationship with the lender can play a role in your loan.The longer the relationship, the better is the lender's understanding and trust. If you are already running a 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.
The property you are willing to mortgage also impacts your interest rate. There are two different kinds of real estate properties: commercial and residential.Commercial property can include office premises, factories, and manufacturing units. On the other hand, residential property can consist of houses, apartments, and residential land.
If the commercial property has clear ownership and does not belong to any investors, you can expect an affordable loan by mortgaging it. This is because commercial properties are usually located in upscale areas. They also have a higher value and are easier to sell in the case of default. The lender takes on low credit risk by approving the loan on such properties. But when it comes to processing time, residential properties may have an advantage.
This point is correlated with the preceding one. If your property is in a posh location with all the basic amenities within a one-kilometre radius, the lender will grant you a lower interest rate. Whereas if a property is in a less desirable region like the city's outskirts, the rates will be higher. Likewise, if you are mortgaging a property located in a rural area, the lender is less likely to approve your property mortgage loan application.
Remember, location is vital in influencing your property's resale value. Properties with a higher resale value lower the lending risk significantly.
The repayment tenure is crucial in determining your mortgage loan interest rate.Your Equated Monthly Instalment (EMI) comprises the principal outstanding and interest amount. 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. Go through the following table to get this better.
Loan against property availed on March 2022
|Year||Principal paid||Interest paid||Total payment||Outstanding balance|
|2022||Rs. 5,48,594||Rs. 2,81,738||Rs. 8,30,332||Rs. 34,51,404|
|2023||Rs. 7,14,781||Rs. 2,81,619||Rs. 9,96,400||Rs. 27,36,622|
|2024||Rs. 7,81,834||Rs. 2,14,568||Rs. 9,96,402||Rs. 19,54,788|
|2025||Rs. 8,55,176||Rs. 1,41,226||Rs. 9,96,402||Rs. 10,99,613|
|2026||Rs. 9,35,395||Rs. 61,004||Rs. 9,96,399||Rs. 1,64,217|
|2027||Rs. 1,64,217||Rs. 1,850||Rs. 1,66,067||Rs. 0|
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.
|Parameters||5 years term||10 years term||15 years term|
|Loan amount||Rs. 40,00,000||Rs. 40,00,000||Rs. 40,00,000|
|EMI||Rs. 83,033||Rs. 50,670||Rs. 40,571|
|Interest payable||Rs. 9,82,005||Rs. 20,80,437||Rs. 33,02,719|
|Total payable||Rs. 49,82,005||Rs. 60,80,437||Rs. 73,02,719|
The difference in interest payable between the 5 and 15-year loan term is Rs. 23,20,714.
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.
You can choose between a fixed and a fluctuating interest rate when applying for a loan against a property. The fixed interest rate is determined by the lender. On the other hand, floating rates are based on the RBI's benchmark. The floating rate is subject to quarterly revisions and is usually 1% to 2% less expensive than fixed interest rates.
Many people assume that having a high income when applying for a loan against property is not necessary. They believe this because the funds are secured by a high-value real estate asset. But this is only partially true. An average income may qualify you for a loan, but not necessarily at a low-interest rate. You will need a higher income for that.
Borrowers who shift jobs frequently have a harder time getting low-interest loans. The same applies to business owners. Frequent job changes indicate that your career is still in flux. It also implies that you could have trouble repaying your loan in the future.
In addition to that, the lender also considers your employer's credibility. Working for a start-up or a small businesswith an inconsistent salary qualifies you for a high-interest loan against property.
By focusing on the above aspects, you can improve your chances of a lowloan against a property interest rate. The factors aid in the improvement of your repayment potential. Once you are convinced that your profile is good enough, you can visit Poonawalla Fincorp to obtain an affordable loan against property.
Availing a personal loan might seem challenging due to stricter underwriting policy by lenders because of the unsecured nature of the product and the possibility of future Covid-19 waves.