When it comes to long-term financing, no funding option is as popular as a mortgage loan against property. It is primarily because a loan against property availed based on property mortgage allows the borrower to meet a wide range of financing needs, be it personal or professional. Thus, if you have availed a property loan, you can utilise the advance in as much of an unhindered way for your child’s marriage as for the expansion of your business.
Further, available as a long-term financing option, a mortgage loan against property also allows individuals an extended duration for repayment of the advance without having to burden their finances. Not to mention, its increasing ease of availability has made it more and more accessible in the recent times as well. However, it also creates financial commitment for an extended duration, which makes it essential that you plan your finances before availing the advance. Below are some of the important aspects you must consider before availing a loan against property.
Things to Consider Before Availing a Mortgage Loan Against Property
Type of property eligible for mortgage
When it comes to secured financing, lenders accept a number of assets as collateral to provide funds to the applicant. Under a mortgage loan against property, which is obviously a type of secured financing, only fixed asset are eligible for the purpose of securitisation to approve financing.
It thus makes this advance typically distinct from other types of secured loans. However, even under a mortgage loan, not all fixed assets may be eligible for collateralisation. The following are popular eligible assets –
- Residential property (Self-occupied or let-out)
- Commercial property
Remember, lenders often do not accept an agricultural land for asset mortgage to provide a property loan. Make sure to check with your lender to ensure which property is approved for the purpose of this secured financing. The type of property also impacts your chances of maximising the financing quantum depending on the current market value it carries. For instance, a residential property located around essential modern amenities may attract better financing quantum than a residential property that is located in a rural region.
Impact of loan amount and tenure on repayment liability
Your loan eligibility is a sum of risks involved for the lender when financing the amount sought. Thus, your financial standing and repayment capacity are foremost considerations that a financial institution would make when assessing your loan application for approval.
In this scenario, the financing amount and tenure selected for availing a mortgage loan against property can be of crucial importance. Both these factors significantly contribute to the repayment liability a borrower needs to bear, both immediately in the form of monthly instalments, and in the long run until the tenure’s end. However, the impacts differ; whereby the loan amount is directly related to the total liability while the relation of tenure to one’s repayment liability is inversely proportional.
Nevertheless, when it comes to interest accrual, a longer tenure means higher interest payment and vice versa. You must thus consider the time factor carefully to arrive at an optimum tenure choice to make availing this long-term advance a feasible financial decision.
The concept of LTV
LTV or Loan to Value ratio is a concept that rules the fundamental working of any secured advance. It defines the maximum cap on financial availability as a percentage of a collateralised asset’s current market value or resale value, whichever is feasible. It is decided based on multiple external and internal factors like the risk involved in lending for a particular borrower profile, the existing and foreseen market trends, lender policies, and the likes.
In the case of a mortgage loan against property too, LTV bears critical weightage in determining the maximum financing an individual can avail. With some of the reputed lending institutions, LTV can go as high as 90%. Thus, if your property’s current market value is Rs.50 Lakh, you can avail a loan amount as high as Rs.45 Lakh to fulfil your big-ticket funding needs with ease. You must, nevertheless, take care to assess the ease of repayment based on your financial capacity decide on a suitable loan amount and apply with your selected lender.
Credit score and its relevance for mortgage loans
Although credit score is not a mandatory criteria you would need to fulfil when availing a mortgage loan against property, its importance in the context of long-term financing cannot be subsided. It is a 3-digit numeric representation of an individual’s creditworthiness, which can include factors as vast as your timely EMI payments to maximum credit utilisation out of the total available credit.
With the best lenders, a credit score of 750 and above is considered reasonable for the purpose of financing a property loan even though the risk factors involved are moderate to high.Along with these factors, you must also fulfil the minimum eligibility requirements before applying to improve your chances of loan approval. Make sure to provide all proofs of existing income such as salary, business profit, rent received, investment profits, and the likes to improve your repayment capacity and leverage it to negotiate for favourable terms on your mortgage loan against property.