Factors Affecting The Loan Against Property Rates And Their Effects Article

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Factors affecting the loan against property rates and their effects

The loan against property rates are determined by the loan amount, credit rating of the borrower and the equity of the pledged security. All these three factors affect the interest rate directly.

Author: Addi Vardhaman

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The reforms of 1991 marked the dawn of Indian financial system. Capped with professionalism, hi-tech IT applications and diversification, Indian financial and loan market has now at its highest altitude. The entry of foreign banks has helped the system to improve its services. Now, competition is at all time high in the Indian housing finance industry. With the increased competition, the customer has several options to choose his housing finance company (HFC) to apply for a loan according to the need.

The loan against property is growing in the popularity chart as more and more Indians are now taking these loans as the most cost effective solution for their needs. The banks have two prime concerns while providing a loan against home:

1. Repayment capacity of the borrower credit risk involved in the loan deal

2. Title of property(If it free from any legal hassles or not)

The borrower to whom the bank is lending should have the capacity to pay the loan amount back in the assigned time period. Repayment capacity is a major concern of the bank while lending funds to anyone. In case of salaried loan applicants, the borrower needs to have a cheque salary which can be verified by the bank. A track record of salary entries in a bank statement reflects consistency and genuineness of the income source of the borrower.

For self-employed, the banks asks for the record of last three years' financial transaction along with income tax returns. The bank needs to ensure the consistency in profits for three consecutive years to assure that its investment is at safe hands. The loan against property rates also depend heavily on these two factors. The credibility of the borrower and the payable interest rate are inversely proportional. More perfect is the past credit track record of the borrower, lower is the loan against property rates. And the reverse is also good.

The loan against property rates is directly proportional to the loan amount borrowed. The loan amount depends upon the equity of the pledged security. Equity is calculated by deducting the loan burden of the borrower(attached to that property) from the market value of the property. More is the equity, more is the loan amount and lower is the payable rate of interest. Location and furnishing of the home affect its equity. The property(whether residential or commercial) near to a market place has higher equity value compared to that of a property situated at a remote location. Buyers always prefer to buy a well furnished home compared to a semi developed one. So, when the borrower is pledging a well furnished home at a prime location, the loan against property rates automatically come lower.

The nature of the pledged security affect the loan against property rates. Generally the commercial properties fetch a lower rate than the residential one. However, the value of both the properties are increasing. But the rise in the price of commercial property is many a times than the residential one. If the borrower has both residential and commercial property and wants to have lower lower loan against property rates, he/she should pledge the commercial one.

Legal hassles associated with the pledged security has a significant impact on the loan against property rates. If there is clear title of the pledged security, it not only makes a quick loan approval but also makes the interest rate some how lenient. Any legal hassle will increase the interest rate as the borrower is treated as more risky by the lender. By comparing the interest rate of different lending institutions, the borrower can avail low rate loan against home easily.

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Factors affecting the loan against property rates and their effects