What Type of Property Can Be Used for a Loan Against Property?

With benefits like the potential for long-term gains, high returns, and a hedge against inflation, people continue to gravitate towards property ownership to diversify their investment portfolio.

Even when you are in need of funds, you can secure loans against a property to keep your finances on track. Financial institutions are now extending loans against real estate at reasonable lending rates and repayment tenures.

If you are looking to take out a real estate loan, the following article has all the information you need to know.

What is a Loan Against Property, and Which Properties Qualify?

In a loan against a property, the borrower pledges real estate as a mortgage in exchange for funds supplied by a lending institution. The loan facility is convenient as you can take out loans of bigger amounts by leveraging an asset already in your possession.

Plus, borrowing rates on real estate loans tend to be lower than other secured loans, as the interest is determined by the market value of the collateralised property.

The properties that are eligible for real estate loans are:

Commercial Properties

Such properties refer to real estate utilised for business-related activities or as a functioning base for an entity. Office buildings, warehouses, and shops or stores are common examples of commercial properties.

Residential Properties

Residential properties are real estate spaces constructed for human habitation. They include houses, flats, villas, penthouses, societies, and townships.

Mixed-Use Properties

Mixed-use spaces are a common occurrence in megacities where a single property is being used for residential and commercial purposes and, sometimes, even public facilities. Such spaces are gaining traction as they allow owners to channelise multiple revenue streams.

Industrial Properties

Industrial real estate refers to spaces dedicated to manufacturing, storing, and transport facilities, such as factories, depots, and warehouses.

Vacant Plots of Land

Unused plots are also used as collateral for secured loans. Loans secured against undeveloped plots may draw higher interest rates, as such land might be valued less than commercial or residential properties.

Additional Property Eligibility Conditions

Apart from the type of property, lenders also evaluate several other factors before approving a loan:

• Clear title: The property must be free from legal disputes and ownership should be clearly established.
• Approved plans: For constructed properties, sanctioned building plans from local municipal authorities are required.
• Location: Properties located in high-demand or urban areas typically get better loan-to-value (LTV) ratios.
• Usage compliance: The property must be used or classified in line with zoning norms (e.g., residential or commercial use).

These conditions ensure that the collateral remains secure and marketable during the loan tenure.

Benefits of Real Estate Mortgage Loans

Here are some benefits of real estate mortgage loans:

How Lending Rates Are Calculated On Loans Against Property

If you are considering taking out a loan by collateralising a property, you can choose between two types of interest rates:

Fixed Rate

Under this option, the interest rate remains constant throughout the loan repayment tenure.

Floating Rate

In this method, the interest rate on the loan amount varies with market fluctuations. Floating rates on loans are linked to the repo rate—the rate at which the Reserve Bank of India (RBI) lends to other financial institutions.

Other Applicable Charges

Apart from the interest on the principal, lending institutions might levy the following charges on a real estate loan:

Processing fees

Financial institutions charge a nominal percentage of the loan amount as compensation for all the administrative work required in approving a loan.

Part-payment fee

An institution imposes a small charge when the borrower pays a certain amount of the principal before the repayment period is up.

Foreclosure charges

A lending institution levies this fee if the borrower settles a loan before the due date.

Factors Which Determine Your Loan Eligibility

Several key factors influence whether your loan application gets approved:

• Financial institutions generally prefer a CIBIL score of 750 and above.
• Borrowers should have a stable income. Self-employed applicants should have been running a successful business for at least three years at the time of applying for a loan.
• A prime location property is likely to fetch a higher value.
• The smaller the loan amount, the lower the interest burden.