Real estate is among the best investment options. You benefit not only from the property appreciation but also in the event of a dire financial situation, you can use it to get funding against it under the debt product called loan against property. However, this financing option is surrounded by many misconceptions that must be clarified. Let’s discuss and debunk a few.
Busting Loan Against Property Misconceptions
1. Available only to Salaried Class
Many believe that a mortgage loan is available only to the salaried class. But this is not true. Business owners who possess factories, farmhouses, hotels, schools, or any other real estate that generates revenue are acceptable as collateral for funds.
In fact, commercial properties have a better market value. For example, suppose there are properties A and B in an XYZ market. A has several small and medium-sized shops that can be rented out to different small business owners. Property B is a residential house, and its structure is such that it can be rented out to only two distinct families at a time. In this case, even though both properties have a similar plot size, commercial property will be preferred due to its income generation potential and better appreciation rate.
2. High Income is Required
Well, this is not always true. Your income should be sufficient enough to manage your monthly obligations. Moreover, the income criteria are not very stringent since the loan is secured by worthy real estate.
Even an annual income of Rs 2.5 lakhs is sufficient for loan approval, but the disbursement amount will be slightly lower here.
However, keep in mind that if your income is inconsistent, for example, your employer has a habit of delaying salary, or there is no fixed date of salary credit, you will be rejected for the loan against the property.
3. DTI Ratio is Not Important
DTI stands for debt-to-income ratio. Suppose you earn Rs 85,000 a month. The property you wish to mortgage has a market value of Rs 95 lakhs. Your funding requirement is Rs 45 lakhs.
When the lender reviews your credit report, they find that you have car loans, personal loans, and an education loan on your shoulders. The total amount from your income towards debt repayment is Rs 60,000, and you are left with only Rs 25,000 a month. In this case, your loan against property lender will reject your application. The reason is that they assume the remaining amount will be used to meet necessities, like paying for utility bills, groceries, insurance, etc.
Typically, a DTI of 50 or lower is accepted.
4. Property Location is Not Important
Lenders do not offer funding against every real estate property. For example, various lenders in the market do not sanction funds against agricultural land. Moreover, location also plays a deciding factor regarding the borrowing amount and interest rate.
For example, suppose you have two properties. One is located on the city outskirts, where amenities like hospitals, schools, and grocery stores are not within a 5-7 km radius.
The other property is in a prime location. Within a 3-km radius, you will find hospitals, shopping malls, schools, grocery stores, ATMs, etc. In this scenario, the lender will approve higher funds for your second property. The reason is that if you default on your borrowing, the lender can easily auction the property and recover the losses.
5. No Ownership Right
Mortgaging does not mean you lose the right over your property. The lender only holds conditional ownership. It means their right is triggered if you default on your payment.
Meanwhile, during the loan, you are free to use it as you desire. You can either rent the mortgaged property for additional income or proceed with renovations or improvements without requiring permission from the lender.
Conclusion
Loan against property myths often mislead potential borrowers. Contrary to popular belief, this financing option isn’t exclusive to the salaried class or requires exceptionally high income. Debt-to-income ratio and property location do matter, and borrowers retain ownership rights while using the loan. By debunking these misconceptions, individuals can better understand and utilise this valuable financial tool for their needs.
