If you own property, taking a loan against it is a well-known option. But what if the property is leased out? Well, you can still avail of a loan against the future rent that you are likely to earn from the property.
Many banks and housing finance companies offer loans against rent receivables.
This kind of loan has a few advantages. For one, the loan is given on the strength of the rental income and the quality of the tenant.
So, even if the rent is the only source of income, but you have a stable tenant, you may qualify for a better rate of interest under this scheme. Also, you can take a loan against rent from a jointly-owned property.
How it works
To avail of a loan against rent receivables, the property must not have any loans against it and must fetch a regular rent. There must also be a lease agreement for an extended period of time, say five to seven years.
Typically, the property must be a commercial one, such as an office space or a shop, but residential property may also be eligible for loans in some cases. For example, Karur Vysya Bank offers loans against rents from residential properties such as independent houses and flats, if they are leased to PSUs, government and banks. To grant a loan, the lending institution will assess the rental potential of the building and the rent-paying capacity of the tenant. An agreement is drafted between the lender, owners and the tenant to assign the primary right on the rent to the lender. Every month, rent will be paid by the tenant to the lender, covering the loan EMI.
Any amount in excess of the monthly payment dues to the lender will be paid to the owner.
The owner needs prior consent from the bank to sell the property when the loan is running, says SM Swathi, Executive Director, Bharat Mahila Bank. The loan can be closed before the sale of property or with the consent of the bank at the time of sale of the property.
The terms of the loan typically depend on the lease deed. For instance, the loan tenure is generally limited to the number of years for which there is a lease agreement. That said, depending on other merits, the loan tenure can exceed the lease period if there are suitable renewal clauses, says KA Babu, Retail Business Head, Federal Bank. The loan term can be as long as 10 years.
The amount given is based on the loan tenure and rent dues.
For example, IDBI Bank limits the loan amount to 85 per cent of the rent receivable if the loan term is less than three years.
The discount factor decreases to 75, 65 and 55 per cent for loan terms of up to five, seven and 10 years, respectively.
The minimum loan amount is typically Rs.5 lakh and the maximum can be as high as Rs.10 crore. SBI, for instance, limits the loan amount to Rs.5 crore in non-metros and Rs.7.5 crore for properties in metros.
The rate of interest is typically comparable to the rates offered for loan against property and is about 13-15 per cent.
The profiles of both the tenant and the owner are considered when deciding the rates. Typically, if you have a multinational corporation or other reputed tenant, you may be able to negotiate a better rate, says K Mahalingam, Managing Director, RupeeZone.
Normally, the loan processing may take seven days after submission of all required documents. The lender will also charge a processing fee of 1-2 per cent of the loan amount. Prepayment charges on the loan are based on the RBI guidelines.
So, if the borrower is an individual, there will be no additional charge if the loan is repaid before the term.
What lenders check
The location of the building and the possibility of finding an alternative tenant are also taken into account, says Babu.
Banks may require that the lessee company should have been in existence for a minimum period of five years and making profit for the last two years.
Also, the lender will verify if property and other tax dues have been paid.
The building and any furnishing and fittings must also be insured, says Mahalingam.