How to Reduce the Loan Against Property Interest Rate?

There was once a time when people feared taking loans. To fulfil life's major goals, such as funding a child's education or wedding, building a home, etc., they saved over the years. These days, more and more people have started becoming comfortable with the idea of loans. Loans allow borrowers to afford things in the present and pay for them in them in the future. When taken after proper planning, loans are an excellent way to take care of one's responsibilities.

Broadly, loans are categorized into two different types: secured and unsecured. Secured loans involve a collateral or an asset. The borrower avails of a loan by pledging this asset as collateral. In the case of loan default, the lender can sell the property for loan recovery. Unsecured loans do not involve any security and are sanctioned solely based on the credit profile of the borrower.  

Loans against property are a type of secured loan. In these types of loans, a borrower pledges a residential or commercial property as collateral. Some lenders even accept land as collateral. Since loans against property are a type of secured loan, the risk involved for the lender in lending money reduces considerably. Thus, lenders sanction loans against property at quite affordable interest rates. Further, loans against property come with a long repayment tenor, which further makes it easier for borrowers to repay loans against property quite easily. Owing to these reasons, property loans have become quite popular. If you are planning to avail of a property loan, you must try your best to get the lowest loan against property interest rates possible. Low interest rates help borrowers keep their EMIs within the affordable range. They also help borrowers save a lot of money in the long run by reducing the overall cost of borrowing the loan. Therefore, borrowers are advised to do thorough market research and talk to as many lenders as possible and sign on a loan agreement only when they know they have managed to avail of the lowest interest rates possible.  

The focus of this article is on tips to reduce loan against property interest rates. However, before we go ahead and share these tips, let us first try and develop an understanding of the factors that affect loan against property interest rates.  

Factors that Affect Loan Against Property Interest Rates 

1. Loan-to-Value Ratio 

The loan-to-value ratio or LTV ratio refers to the percentage of a property's market value that can be sanctioned as a loan. Let us understand this with an example. Let us assume that a borrower wants to avail of a loan worth Rs.1 Crore to buy a property worth Rs.2 Crore. In this case, the LTV ratio is 50%. However, if the borrower wants to avail of Rs.1.6 Crore to buy the same property, the LTV ratio would become 80%. Lenders can sanction up to 80% of a property's value as a loan. In the case of high-value properties, the LTV ratio goes down.  

Borrowers who want to avail of a low interest rate loan against property are advised to keep their LTV ratio low. Doing so minimizes the risk involved for the lender and therefore, lenders sanction these loans at low interest rates.  

2. Credit Score 

When it comes to loans against property or property loans, the credit score is important as it indicates a borrower's ability to repay loan on time. The credit score is a three-digit number between 300 and 900 that indicates a borrower's creditworthiness and repayment capacity. Borrowers who have a CIBIL score of 750 and above are seen as highly creditworthy borrowers by lenders. Such borrowers are highly unlikely to default on loan repayment and therefore, lenders offer property loans at low loan against property interest rates to such borrowers. Therefore, if you want to avail of a property loan at low interest rates, check your CIBIL score before beginning the loan application process. Go ahead with the loan application process only if your credit score is 750 or above. If it is below 750, apply for a loan only after improving your credit score.  

3. Income and Repayment Capacity 

Though loans against property are secured loans and the borrower can sell the pledged asset for loan recovery in case of loan default, lenders try and make sure they are lending money only to someone who will be able to repay the loan on time. They do so by assessing the borrower's income and repayment capacity. Thus, borrowers employed with a reputed multi-national company or a public-sector company and having a stable job and income get offered lower interest rates than borrowers who switch jobs often or cannot establish income stability. If you think you may have to avail of a loan against property sometime in future, make sure not to change jobs often and maintain a stable source of income.  

4.Type of Property 

In the case of a loan against property or property loan, the type of property and the quality of the collateral also plays a key role in determining the interest rate that will be offered to a borrower. In general, lenders charge a lower rate of interest when the property pledged as collateral is a residential property since borrowers are more serious about loan repayment when the property pledged as collateral in their home. The quality of the property matters too. Lenders also charge a low loan against property interest rate when the property pledged as collateral is located in a central location, is equipped with all modern amenities and therefore, has high resale value. Lenders increase the rate of interest when the property pledged as collateral is an old property having low resale value. 

5. Loan Tenor 

The loan tenor also affects the rate of interest that a borrower gets on a loan against property. Short tenor loans involve lower risk for the lender and therefore, lenders sanction these loans at low interest rates. In comparison, when the loan tenor increases, the interest rates on a property loan increase too since the risk involved for the lender goes higher. 

Now that we have developed an understanding of the factors that affect loan against property interest rates, let us look at what loan against property borrowers can do to avail of a loan on low loan against property interest rates.  

Handy Tips on What Borrowers Can Do to Avail of a Low Interest Rate on their Property Loan 

1. Negotiate With Different Lenders 

Many borrowers make the mistake of accepting the first offer they get from the first lender they talk to, mostly because people avail of loans against property when they need money urgently. Thus, they accept the first loan offer they get. This is a mistake borrowers must avoid making at all costs. If you want a low interest rate, talk to a few different lenders and see what each one is offering. Then, negotiate with all the lenders and use a loan against property EMI calculator to compare different offers and figure out which lender is offering you the best deal.  

2. Make Sure Their Credit Score is at least 750 

Borrowers who want to score a low interest rate loan against property deal must make sure their credit score is at least 750. If your credit score is below 750, do not worry. By practicing strict financial discipline, you will easily be able to improve your CIBIL score and make it above 750. Here are a few things you can do to improve your credit score, if it is below 750.  

- Make it a point to never miss EMI and credit card bill due dates. While missing one or two due dates won't affect your credit score majorly, continuously missing deadlines will cause it to decline tremendously. So, set up reminders or auto-payments and make it a point to clear all bills before the due date.  

3. Go for a Short Loan Tenor 

Yet another way you can avail of low loan against property interest rates is by going for a short loan tenor. When a borrower opts for a long loan against property tenor, the chances of loan default increase and therefore, the risk involved for the lender increases too. This is the reason why lenders offer lower interest rates on short tenor loans and a higher interest rate on long tenor loans.  

4. Opt for a Loan Against Property Balance Transfer 

The loan balance transfer is a facility that most borrowers offer these days. When borrowers opt for this facility, they get the chance to transfer their loan from one lender to another one offering better interest rates or other beneficial terms and conditions. Since borrowers on floating interest rates can now close their loan without paying any fees or charges, opting for loan balance transfer has become an easier choice. However, loan against property transfers involve a fee. Therefore, borrowers must opt for this loan only during the early years of the loan when the interest they will save over the tenor of the loan will be much higher than the loan against property balance transfer cost. 

 5. Wait for Festive Season Offers or Apply with a Lender with Whom You Already Have a Long-Standing Relationship 

Yet another way you can avail of a low interest rate on your loan against property is waiting for seasonal offers. During the festive season, almost all lenders slash their interest rates to attract new customers. So, if you don't need the money urgently, you can consider waiting for the festive season. Further, most lenders extend the lowest loan against property interest rate deals to their most loyal customers. Thus, to benefit from low interest rates, consider applying with a lender with whom you already have a long-standing relationship.  

6. Opt for a Floating Rate of Interest

 Loans against property are offered on two different types of interest rates: fixed and floating. In the case of fixed interest rates, the rate of interest does not depend on external market conditions and remains the same through the tenor of the loan. In the case of floating interest rate loans, the rate of interest depends on external market conditions and therefore, the floating interest rate changes with changing market conditions. The risk for lenders is much higher in the case of loans availed of on fixed interest rates. Therefore, lenders charge a much higher interest rate on these loans. If you want to reduce your loan against property interest rate, consider availing of a loan on floating interest rates.  

7. Pre-pay Your Loan 

Borrowers who are on a floating rate of interest can prepay their loan at no additional cost. Prepayment is when you pay off a certain part of your loan. On the other hand, when you pay off the entire loan amount, it is known as foreclosure. When you prepay your loan, you either reduce the tenor of the loan or your EMIs both of which cause your effective interest rate to go down.

Final Words

The loan against property interest rate you get will play a crucial role in determining how easy or difficult it will be for you to repay your loan. Use the tips mentioned in this article to avail yourself of the lowest interest rate possible and make repaying the loan convenient and easy.