What are loans against rentals?

If you have a commercial or a residential property which you have put on rent, and are looking to refurbish to improve the rental prospects. In case you don’t have enough capital to do so, all you need is a loan against the rentals.

Yes, you could avail a loan to refurbish your property based on the future rent you are going to get from that property. This is not only cheaper as compared to the personal loan, but also it would be easier as the EMIs (equated monthly installments) would go from the rentals.

While most of the banks approve loan only against commercial properties, there are a few banks which approve the loan for the residential properties as well. Even some of the banks look if the property is rented to reputed companies or firms as a criterion. These depend on the bank you are looking forward to availing the loan from.

Before getting into the details about the benefits, features, and rate of interests charged, let us go through the requirements and pre-requisites for the loan against rentals.

Eligibility and pre-requisites for Loan against Rentals:

To avail a loan against rental you must make sure the following conditions are met:

1. The property is rented out in the past and has a scope of future rental income.

2. The property against which the loan has to be availed is built as per the plan approved by local municipal authorities.

3. You should have sound financials and repayment capacity.

4. The tenant of the property has a sound financial background.

5. The rental agreement between you and the tenant is confirmed and up to the mark.

Documentation required for the loan:

If you fulfill the above eligibility criteria, then you need to submit the below documents in order to avail your loan against rentals:

1. Duly filled loan application form

2. Latest passport size photographs

3. Copies of identity proof such as PAN card, Voter’s ID, Aadhar card, Passport etc.

4. Copies of residence proof such as Current electricity, telephone or water bills, Aadhar card, Passport etc.

5. Copies of PAN card

6. Salary slips, proof of business or income proofs as applicable (in some cases for both you and your tenant)

7. Income tax returns of past 3 years (in some cases for both you and your tenant)

8. Property related documents such as registry, ownership deed, approval of the plan by the municipality, property tax receipts etc.

9. Rental agreement

10. Acknowledgment receipt of Processing Fee from the bank

The bank enters a tripartite agreement including you and your tenant, where the tenant has to pay the rent to the bank directly as EMIs. This tripartite agreement is signed apart from a separate term loan agreement signed between you and bank.

Features of the Loans against rentals:

Loans against rentals have the following features:

1. The rate of interest: Since it is a secured loan the rate of interest remains lower than the personal loans. Banks generally charge rate of interest between Base rate + (2.5 – 3.85 %) depending upon the bank and repayment capacity.

2. Repayment Tenure: The repayment tenure could be as high as 10-15 years according to the bank and your credit repayment capacity.

3. Loan Amount: The loan amount could as high as 70-90% of the current market value of the property.

4. The proportion of loan repayment from rental amount: The proportion of loan repayment from the rental amount is lower for a longer rental period and is often on a higher end for the shorter rental period.

Benefits of the Loans against rentals:

1. Approval: The approval and processing of a loan against rentals are easy and hassle-free.

2. Interest Rates: Lower interest rates as compared to personal loans.

3. Repayment Tenure: Higher repayment tenure of up to 10-15 years.

4. Amount approved: Higher approved loan amount of up to 70-90% of the current market value of the property.

5. Ease of repayment: Could be easily repaid by the rental income of the property.