Home Truths. Home is where the loan is

Owning a property is traditionally a sought-after goal. One reason for the popularity of the asset is that it helps the owner get a loan when there is need. Lenders offer different loan products with a house as a collateral.

These loans are offered at lower interest rates compared with unsecured personal loans. The loans are also flexible and allow the borrower to use the money for any purpose — home improvement, personal expenses or for business.

Top-up loan

A popular and attractive loan product for home owners is a top-up on their existing home loan. Top-up loans are given to existing home-loan customers who meet certain criteria. For one, the house must be completed and not be under-construction.

Also, banks may look for a 12-month repayment track-record without defaults. Others such as Bajaj Finance offer top-up loan exclusively for customers who transfer their home-loan balance from their former lender to Bajaj Finance.

The maximum amount of top-up you can get is limited by the outstanding loan and the property value. For example, with HDFC Bank, the maximum outstanding loans plus the top-up cannot exceed 80 per cent of the property value (for loans of up to ₹75 lakh). The loan-to-value is typically lower for higher-priced properties. The interest rates on the loans are close to that of regular home loans. SBI, for instance, offers top-up loans of ₹ 5-20 lakh at 8.7-8.8 per cent interest rate for salaried borrowers — comparable to the 8.5-8.6 per cent for home-loan rates for amounts of up to ₹30 lakh. Rates typically increase as the borrowing amount increases — loans of up to ₹1 crore are available at 9.05-9.15 per cent.

For floating-rate loans, Axis Bank charges home-loan rates if the top-up is up to 30 per cent of the original home loan amount sanctioned. The loan tenure is typically high, but varies with bank. SBI allows a tenure of up to 30 years (based on the age of the borrower), while HDFC Bank limits it to a maximum of 15 years.

Loan against property

The next best option is taking a loan against property, commonly known as LAP. Terms such as tenure, loan-to-value and interest rates are less attractive than a top-up loan. For example, with HDFC Bank, for existing customers, the principal outstanding on all existing loans and an LAP should not exceed 60 per cent of the property value. For new customers, the limit is 50 per cent.

The interest rate is higher than home-loan rates. For instance, the interest rate for a floating-rate loan with PNB is 10.5-12 per cent, as against a home-loan rate of 9-12 percent. The rate also varies based on various parameters such as whether the property is self-occupied or let-out, commercial property or residential, and the loan amount.

Even with its limitations, LAPs can be handy in many cases. For instance, unlike a home loan, even commercial property ownership can get you a loan. Also, not just constructed properties, you can get a loan even against a plot of land. The quantum of loan may also be large, based on the value of the property. For instance, Tata Capital gives loans of up to ₹5 crore, while SBI’s loan can be for up to ₹7.5 crore.

Rent receivable loan

Yet another option, if the property is leased out and there is visibility on rental income, is to consider a loan against rent receivables (LARR). These are typically given against commercial properties such as office spaces or shops.

Typically, lenders require that the property be leased out to a reputed corporate, bank, MNC, PSU or an institution, rather than to an individual. Banks such as KVB require that the owner execute a power of attorney in favour of the bank to collect the rent. In addition, they may also require that the owner agree to pay the EMI if the tenant fails to pay rent.

The loan value is based on the future rent receivable for the lease period, the type of property and the market value. For example, Bank of Baroda limits the loan to 55 per cent of rent for commercial property and 60 per cent for non-commercial property. HDFC Bank considers the market value and limits the amount to 50 per cent of the property value.

Loan tenure also depends on the lease period. For example, IDBI Bank has a limit of 120 months or the residual lease tenure, whichever is less.

The collateral is the rent receivable and other securities. Indian Overseas Bank, for example, takes only rent receivable for loans of up to ₹2 lakh.

For higher amounts, the leased property should also be mortgaged; and if this is not possible, any other property with a value one-and-a-half times the loan amount can be mortgaged.

Alternatively, liquid assets such as NSC (National Savings Certificate), KVP (Kisan Vikas Patra) or other investments can be provided as security.

The writer is co-founder, RaNa Investment Advisors.

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