Property Loans 101: Why Your Rate Isn’t Just About The Property
Residential properties that are well-maintained and located in a popular area are considered lower risk, and hence, may get you a lower rate on your loan
A loan against property is often considered a low-cost borrowing option that offers hassle-free access to funds. As a secured loan, it often comes with lower interest rates compared to unsecured loans. However, the exact rate you’re offered can vary widely depending on a mix of personal and property-related factors. So, what influences these rates, and how can you ensure you get the best possible deal? Let’s find out.
Property type, location & value
The value and quality of the mortgaged property are crucial for lenders. Residential properties that are well-maintained and located in a popular area are considered lower risk, and hence, may get you a lower rate on your loan. In contrast, older properties, be they residential or commercial buildings, that haven’t been properly maintained, may fetch a higher rate. Also, the better a property’s resale value, the lower your interest rate may be.
Loan-to-value (LTV) ratio
LTV ratio is the percentage of the property’s market value that the lender is willing to lend. A lower LTV means you have made a bigger down payment and have a larger stake in the property. This lowers the lender’s risk, leading to a lower interest rate on the loan against the property. Conversely, a higher LTV means higher risk and thus a higher rate.
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Credit score and financial history
Like other loans, your credit score influences your repayment capability, which is also applicable for loans against property. A high score of 750 or above signals stronger creditworthiness, and portrays you as a safer borrower. This, in turn, can lead to you being offered lower rates. But, a lower score of 600 or below, driven by repayment irregularities can make the rates you’re offered higher, or even lead to rejection.
Borrower’s profile
In addition to your credit score, your financial profile, including your age, income stability, and current debts, are also crucial to the approval process. Salaried applicants with stable incomes tend to be offered better interest rates than self-employed individuals. The exception here may be when the latter can furnish proof of strong, regular income. Additionally, younger borrowers in the early years of their careers may also be viewed favourably.
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Loan tenure and amount
Loans for shorter tenures and smaller amounts lower the lender's risk and uncertainty, leading to lower interest rates for the borrower. But, if you have a bigger loan with a longer tenure, it increases the lenders’ risk, leading them to offer you higher rates on your loan.
Market conditions & RBI policy
Rates for loans against property are also influenced by broader economic factors such as the central bank’s policies. When inflation rises or RBI raises the repo rate, lending rates also tend to rise. This is because such shifts lead to a rise in the bank’s borrowing costs. Lenders also employ risk-based pricing strategies that take into account the assessment of your repayment likelihood, including personal and property-related factors.
The conclusion we can draw from the points mentioned above is that rates for loans against property are not uniform. They vary based on a number of factors like your property’s value, loan specifics, macroeconomic factors, and your financial strength. Understanding these factors can give you the edge you need to improve your eligibility, and consequently, reduce your borrowing costs. This can not only help you in the long run but also allow you to extract the best value from your loan.
(The author is the Senior Manager, Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)
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