There may be times when you might require a substantial amount for either personal or business purposes. For example: you might require it for a wedding in your family or for arranging funds for higher education or medical emergencies or expanding your business. If you already own a property, rather than selling it you can take a loan against that property. However, before taking a loan, one needs to keep a few factors in mind.
Here are five rules to be kept in mind before taking a property loan:
- Borrow within your means:
Although your property might have a certain value, it is important to borrow within your means. You can generally get a loan upto 70% of your property’s value. But if your purpose is fulfilled by availing an amount less than this, then you should consider borrowing only as much as you need. If you borrow more than you require, you might find it difficult to repay your dues on time.
- Understand the interest terms:
The interest rate of your property loan will play an important role in determining your EMI. Over the last few years, interest rates have been falling and have become quite attractive for prospective home buyers. However, consumers must check whether the interest rate is fixed or floating. If the interest rate is fixed, then it would remain the same throughout the tenure of the loan. If it is floating, then it will keep changing.
- Opt for a shorter tenure:
A longer duration loan may seem favourable when a loan against property calculator is used as the monthly EMI’s would be smaller. However, a smaller EMI would mean significantly high payments towards interest for a consumer even in this low-interest rate regime. A shorter tenure will enable the borrower to get rid of the home loan liability quickly and payments towards the interest component of the loan would be kept to a minimum.
- Do not miss your EMIs:
Missing EMI payments can result in penalties, an increase in interest rates and deterioration of the borrower’s credit score. It would also make it difficult for the borrower to obtain loans in the future at attractive interest rates.
The ongoing pandemic has impacted self-employed as well as employed professionals. Self-employed individuals have witnessed a slowdown in their businesses which has affected their income. Salaried professionals are concerned about the threats of job losses or salary cuts.
Therefore, before taking a property loan it is important to calculate the estimated EMI by using a loan against property calculator. Once you are able to calculate your EMIs you would be able to plan for them. Thus you can avoid missing EMIs.
- Know all the terms and conditions:
The fine print of any contract to be signed must be read carefully especially in this scenario wherein a property is being mortgaged to fund one’s dream home or business. One must scrutinise various terms related to prepayment of loan, linkage of interest rate to the prime lending rate as well as the schedule of charges. Quite often, borrowers would have to take an insurance policy (known as a credit protect policy) along with the property loan as well as have to bear other charges like administrative charges, processing fees, etc. Although most of these terms are the norm today, it is recommended that a borrower be aware about them beforehand.
Mortgaging one’s property to take a loan is a big step. The borrower would have to practice fiscal discipline and consistently repay the EMIs. Therefore, it is prudent to plan in advance before availing of a property loan.