A loan against property is a financial tool that allows a borrower to avail of a loan by pledging their property with their chosen lender. Also known as mortgage loans, loans against property are fairly cheap.
In fact, mortgage loans are the cheapest after home loans. Depending on the lender as well as a borrower’s income profile and credit history, the interest rate on these loans varies between 8% and 25% per annum. Further, with the right lender, one can avail of funds up to Rs.5 crore or even higher for a tenor extending up to 20 years.
In short, a loan against property is one of the easiest, quickest, and safest ways to arrange money, when you need it the most. However, since this type of loan involves giving partial rights over your property to a lender, one must be extra cautious when availing of such a loan. In this article, we discuss with our readers a few things they must keep in mind when taking a mortgage loan.
Borrow What You Can Easily Repay
Loans are repaid in the form of EMIs, which comprise a principal component and an interest component. As the years advance, the interest component of the EMI goes down and the principal component increases. One of the mistakes that people often make when taking a mortgage loan is borrowing more than they can repay. A typical lender will sanction anywhere between 60% to 75% of your property’s value as a loan. Thus, if your property is worth Rs.1 Crore, you may easily be able to get a loan of Rs.70 lakh against it. However, just because you can borrow this amount does not mean you should.
Before taking a loan, figure out what EMI will you be able to comfortably repay? Do you have any other EMI obligations or debt that you must first take care of? Are there any dependents? Finding answers to these questions will help you borrow the right amount. As a rule of thumb, remember all your EMIs combined must not exceed 50% of your net monthly income.
Opt for a Shorter Tenor
Just like you shouldn’t borrow as much money as you can, you must not also automatically opt for the longest tenor. Loans against property are available for a tenor extending up to 20 years. The longer the tenor, the lower are the EMIs, which makes borrowers think that opting for a longer tenor automatically makes a loan more affordable. This is only partially true. Opting for a long tenor makes the loan affordable, however, it also increases the overall cost of the loan. Tenor and loan against property interest rate directly proportional: the longer the tenor, the higher is the overall interest paid.
Therefore, try to strike the right balance between your EMIs and tenor. Try to keep the tenor as short as is comfortably possible for you.
Never Miss an EMI
If you are planning to take a mortgage loan or a loan against property, set aside an emergency fund for days when things aren’t working your way. This will help you never default on payments.
A missed EMI will not only attract a penalty from your lender but will also diminish your credit rating and your chances of getting a loan in the future.
Take an Insurance If You Are Planning to Borrow a Large Sum of Money
Borrowers must be cautious and plan well when taking any type of loan. However, they must be extra cautious when availing of a loan against property, primarily because this type of loan involves pledging one’s property as security. To be safe, always take insurance cover if you are borrowing a large sum of money. Financial emergencies and unfortunate events can happen anytime — insurance will make sure you can keep the ownership of your property even when things aren’t going as planned for you.
Read the Fine Print
Often, in their hurry to get the loan amount in their bank account, borrowers sign on the dotted line without reading the agreement properly. If you are planning to take a loan against a property, make sure to never sign on anything without reading the loan agreement properly. You might even consider getting it checked by a lawyer.
Look for late fees and penalties. Make sure your lender has made all details regarding this clear. The same goes for facilities like foreclosure, part-payment, and pre-payment. Making sure details related to these are clearly mentioned in the loan agreement will help you avoid problems at a later stage.
A loan against property allows a borrower to leverage the value of one’s property without losing ownership of the property. However, since this type of loan involves pledging one’s property as collateral, one must be extra cautious when taking a mortgage loan. Following the tips mentioned in this article will allow you to make the best of this type of loan, avoid the worst, and repay your loan on time. Whatever you do, make sure to choose a lender you can rely on.