Most homebuyers who buy a second home or investors who invest in a commercial property do so to build a second source of income. Borrowers rent out this second home/commercial property and earn money from it. This is a smart move, but people rarely can leverage the full value of a property. A loan against property allows borrowers to leverage the full value of a property.
A loan against property, also known as a property loan or mortgage loan, is a type of secured loan availed of against commercial or residential property or owned land. The property against which the loan has been taken serves as collateral. If the borrower defaults on loan repayment, the lender can sell off the property to recover the loan money. Before discussing the risks of taking a loan against property, let us try and understand why mortgage loans are so popular.
Loans Against Property: Benefits
Mortgage loan interest rates are quite low, as property loans are loans backed by collateral. Therefore, the risk involved for the lender is almost zero in the case of these loans. Due to this specific reason, lenders charge low mortgage loan interest rates. Loans against property are the second cheapest after home loans, with the current interest rates ranging between 8% and 11%.
Sizeable Loan Sanction
In case of an emergency, most people avail of a personal loan. Not only are personal loans extremely expensive, but they also give borrowers access to only a limited sum. On the other hand, in the case of loans against property, the size of the sanction depends on the value of the property mortgaged. The LTV ratio in the case of these loans can go up to 50% to 60% of the pledged property. Thus, a loan against property gives borrowers immediate access to a substantial amount of money.
Long Repayment Tenor
Loans against property are big-ticket loans, and therefore, lenders give borrowers anywhere between 15 to 20 years to make repayment simple and stress-free. The long repayment tenor involved considerably eases the burden of loan repayment.
Zero End-Use Restrictions
One of the most significant advantages of a loan against property is that the loan money comes with zero end-use restrictions. Borrowers can use the borrowed money to plan a daughter's wedding, pay for a child's education, start a new business venture, invest in another property, etc. As long as you continue to pay your EMIs on time, your lender will not question how you spend the loan money.
In conclusion, loans against property offer several advantages, and these advantages make property loans an excellent and convenient way to get access to a substantial amount of money, especially in times of need. However, borrowers must keep in mind that since loans against property involve collateral, lenders sanction these loans after performing proper due diligence. The loan against property application and approval process can be rather long. So, be patient.
Now that we have a clear understanding of the benefits of a loan against property, let us look at the risks involved in availing of such a loan and why proper financial planning is a must when availing of these loans.
The Risks Involved in Taking a Loan Against Property and How to Mitigate Them
Loans against property are loans availed of against a property. The property against which the loan has been taken serves as collateral. In simpler words, when a borrower avails of a loan against property or a mortgage loan, they retain full ownership of the property and can continue to use the property as they please; they also give their lender the right to sell the property for loan recovery in case of loan default.
If a borrower has availed of a property loan and, due to unforeseen circumstances, they miss paying their EMIs for an extended period, their lender can sell the property for loan recovery. Missing one or two EMIs will not lead to your property being sold by your lender. In this case, your lender will simply send you reminders to clear EMIs and slap a late fee on you. Your inability to clear two or three EMIs consecutively will also impact your credit score.
Missing EMIs will cause your credit score to go down and negatively impact your ability to avail of a loan in the future. However, if you don't pay your EMIs for an extended period, say six months or more, your lender can act and decide to sell your property for loan recovery. Even in this case, the rules and guidelines specifically say that a lender cannot sell a pledged asset or collateral for loan recovery without first informing the property owner and giving them ample time and a chance to clear their dues and save their property.
In any case, there is no denying that loans against property carry some risk. For this reason, borrowers are advised to avail of a loan against property or property loan after careful financial planning. We recommend the use of a loan against property EMI calculators.
Use Mortgage Loan EMI Calculator to Minimise the Risks
A mortgage loan EMI calculator is a handy online tool that borrowers can use to calculate their EMIs for the loan amount they wish to avail of. Loan against property EMI calculators are easy to use. All one must do is enter three details: the loan amount that a borrower wishes to avail of, the loan tenor that works best for them, and the mortgage loan interest rates offered to them. Once a borrower enters these values, the loan against property EMI calculator gives them their tentative EMIs. Here's how this handy tool minimizes the risk involved in the case of property loans.
- A loan against property EMI calculator tells a borrower their tentative EMIs even before they have applied for a loan. Thus, with the help of a loan against property EMI calculator, borrowers can know for sure if they can even afford the loan amount they wish to avail of or not.
- Using a loan against property EMI calculator, borrowers can try various combinations of the loan amount, tenor, and interest rate and arrive at a combination that works well for them.
- Borrowers can also use a loan against property EMI calculator to compare offers from different property loan lenders and go with the most lucrative one.
- A loan against property EMI calculator helps borrowers avoid loan default by helping them figure out the right loan amount and EMI for them.
- It also helps them save time and energy by doing all the lengthy calculations for them.
If you are planning to avail of a loan against property, it is crucial that you borrow what you can easily repay. For instance, if your collateral is worth Rs.2 Crore, you can easily avail of Rs.1.25 Crore as a loan against it. However, if you think you cannot afford the EMIs for a Rs 1.25 Crore loan, it is better to borrow a lower amount but an amount that you know you will be able to easily repay.
This is crucial to ensure the safety of the collateral. Always use a loan against EMI calculator to help you decide the right loan amount and a loan against property eligibility calculator to understand the loan amount you qualify for.