Taking A Loan Against Property? 5 Things You Must Consider
A loan against property is a popular way for quick access to cash. Banks usually sanction it speedily. But as the recipient of the loan, you have to be conscious of are the various factors before accepting such a loan.
Life is seldom smooth regardless of how well you have prepared for contingencies. No matter how many hours went into financial planning, there is always an emergency need for funds. It may be for health issues, emergency medical treatment, marriage or education. A residential or commercial property will always come to your rescue. You can borrow several lakhs from a bank or financial institution as a loan against property. It is a secured loan since your house is mortgaged or kept as security.
Five Things You Must Consider Before Taking A Loan Against Property
1. Loan against property interest rates – Most banks today offer a floating rate of interest on loan against property at varying rates. The rate currently is an average of 11% but will rise and fall depending on monetary policies and economic climate.
Since the loan amount is large, even a 1% change in interest will impact your EMI. Spend some time calculating different EMIs of 10%, 12%, and 14% using online EMI calculators. Take into account future incomes and change in the interest rate before committing to the loan amount.
2. Loan amount – Banks will offer a loan of 60-70% of the property value. The bank will, of course, verify what type of property you are mortgaging– self-owned and self-occupied residential property, self-owned land or self-owned commercial property – before they agree to provide a loan.
Loan against property eligibility also depends on your age, occupation, income, the burden due to the repayment of any other loans, and other factors. Go with a bank offering you loan amounts based on repayment capacity.
3. Loan tenure – Loan against property interest rates and tenures vary across banks. For example, the interest rate may vary between 10 and 14% for tenures from 15 to 18 years. A longer tenure means the EMI will be lower, but the total interest that you pay will be higher. Ultimately, your repayment capacity should dictate the loan amount and tenure.
4. Processing fee – Ask around for the lowest processing fee. If the processing fee is 1% then on a loan of 60 lakhs it could be a hefty Rs. 60,000. Usually, banks that offer lowest interest rates ask for high processing fee ranging up to 3%. You have to decide if the low-interest rate can offset the one-time outflow in the long run
5. Penalty fee- When taking a loan against property eligibility, make sure the penalty clause doesn’t hurt you. If the loan has a tenure of 8 years, but after four years you find yourself in a position to repay it, then a prepayment penalty is charged. Remember to weigh the cost or prepayment against the EMI to take a decision.
Remember, if you miss your EMI payment date, you will be charged a late fee. If for some reason you cannot pay an EMI, discuss with your bank representative the reasons, and try to get the EMI rescheduled.
Loan against property is an accepted way of raising funds. However, you have to exercise extreme caution. Take the help of a trained financial planner to get the highest loan amount possible with easy repayment options.