Here if you have a property whether residential or commercial that earns you rental income and you are in need of funds, you can use this loan option as being a secured loan type it is more cost-effective for you as a borrower.
Amount disbursed as loan in this loan type category: Like other loan types, herein bankers and other financial institutions take into account, the value of the rent receivable over the course of the loan tenure as well as the resalable value of a property. Nonetheless, the quantum of loan sanctioned via this stream varies across banks and while some banks extend 80% of the property value or rent receivables value during the tenure, whichever is less. There are some other banks that even offer 90% of the rent receipt value as loan amount.
The amount extended under the category can range in crores and depends on case to case basis.
Factors considered while sanctioning loan against rent receivable
There are other considerations as well that are looked upon by institutions such as net rental income and some of the banks such as HDFC bank has scaled down its loan amount value to just 50% of the property value.
Also regular monthly income flow as well as credit score are evaluated such that the borrower is able to pay back the funds within the residual lease tenure or maximum 10 years, whichever falls early.
In a usual case, the loan against rent receivable is available for up to 10 years and varies across banks.
Being a secured loan type, loan against rent receivables can be obtained at a cost of 1-3% over and above the MCLR or marginal cost of funds based lending rate. The interest rate therefore varies in the range of 9.75-10% and in case of NBFCs it is slightly on the higher side.
Notably, interest rate charged by banks on such loan is also dependent on the creditworthiness of the tenant i.e. tenant's profile also plays a crucial role in deciding your cost of borrowing.
Herein, it comes to be cheaper as being charged to underlying property as in case of other unsecured loan categories such as personal loan, the spread is higher and falls in the range of 3-8%.
Other costs that are to be borne by the borrower include the processing fee (1-3% of the loan amount) and the other is the cost of the valuation report for the property which decides on the loan amount value.
Documents required for applying for loan against rent receivables
A host of documents shall be required for the initial round of scrutiny such as :
1. ID proof
2. Address proof
3. Bank statement of the account in which the rent is credited
4. Property related documents-original title deed, building plan and other supporting tax receipts etc.
After preliminary screening is successful, bank may also ask for financial documents of the tenant to know about his or her ability to pay back in case the need arises.
It is a better and cost-competitive option primarily to secure funds for running small businesses and scores better than other business or personal loan. But, your property will be charged for it.