When it comes to collateral financing, loan against property no doubt gains an upper cut typically for the flexibility of use it comes with. A loan against property is an end-use restriction-free financing option that comes in high-value, enabling individuals to fulfil their diverse financing needs with ease. Thus, be it personal expenses or professional investment requirement, you can easily turn up to loan against property for financial backup if you are an eligible candidate.
As it is a secured funding option, individuals can also avail it at nominal loan against property interest rates. Some of the best lenders also keep other charges competitive to improve borrower affordability. Nevertheless, it is always prudent to understand the interest rate levy and other charges for a loan against property as it is a critical financial commitment spanning over years. Here’s a look at everything you would need to know for a better understanding of your loans against property rates and charges.
Interest Rates on Loan Against Property
The loan against property interest rate determined by lenders comprises several aspects weighing the ultimate levy during loan sanctioning. Some of the factors that affect the rates include –
1.The financial institution’s benchmarking system
It is a common factor for all loans, but has typical RBI intervention when it comes to collateral financing such as loan against property. Benchmarking is a system that helps determine the minimum rate at which a lender can extend a loan, and is usually connected to an internal or external benchmark.
The commercial lending rate is determined by adding the lender’s spread to this benchmark rate. In case of loans against property, most lenders today follow external benchmarking system as per RBI guidelines, whereby the repo rate is a common benchmark rate adopted. A change in this rate can significantly affect the total loan liability due to the high quantum funding provided as loan against property.
2.Type of rate chosen
Another common factor determining the commercial lending rate, it determines whether a loan against property will attract interest rate on fixed or floating basis. Under the fixed rate system, interest calculation throughout the tenure is based on a fixed rate determined during loan sanction. The floating rate system, however, takes into account market rate trends for interest rate determination. Note that the benchmarking system explained above is applicable only under the floating rate system.
3.Loan to Value ratio (LTV)
LTV is the total percentage of the mortgaged property’s current market value that a lender determines as a limit for sanctioning loan. A higher LTV increases the risk of lending, thus attracting a higher rate of interest too, and vice versa. It is advisable to strike a balance between LTV requirement and interest rate levy to decide on a suitable financing offer.
4.Property valuation and age
As loan against property is a financing option extended against residential or commercial property mortgage, the property’s condition is a critical determinant of the interest rate levied. A property with high resale value and a long remaining life attracts reduced rate of interest.
Apart from these factors, an individual’s eligibility also affects the loan against property interest rates. As one’s eligibility related to income, employment, remaining working years, and financial stability are directly related to the risk involved in lending to him/her, the interest rates can vary accordingly. You must also consider other charges like processing fees, Emi bounce charges, statement charges, penal interest, prepayment fees, etc. to make an informed borrowing decision based on your affordability.
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