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Almost all the public sector and private banks, offer loans against future rentals. With this facility, home owners can avail of a line of credit, on the basis of future rentals for their house property which is let-out.
Who can avail of the loan against rentals?
Any person, who is the owner of a commercial or residential property, can avail of this facility. The property can have a single owner or be owned jointly. In case of joint ownership, all the owners will have to become applicants for the loan. This line of credit is available, for properties that have already been let-out or those, for which a lease agreement has been entered into.
Purpose of the loan against rentals
The money raised through the loan against future rents, can be utilised for any purpose – from buying a house or expanding your business, to marriage or education of your children. You can also use the money for repairing or renovating the property. Lenders even allow you to use the money so raised, to repay an existing loan.
Properties eligible for loan against rentals
You can avail of this loan, with respect to a commercial property, which has been let-out or leased to a reputed lessee, like a government undertaking, bank, insurance company or large retail house. The lenders normally have a preapproved list of such organisations.
You can avail of this facility, even for a residential house that is let-out, provided that you have an agreement for a period that at least covers the repayment of the loan against rentals. Moreover, before the bank sanctions the loan against future rentals, it may insist that you have the lease/rental agreement duly registered.
The bank will ask you to provide the basic KYC (know your customer) documents, such as address proof and identity proof, in addition to the duly filled in application form. The lender will also insist for proof, to establish your repayment capacity. For salaried people, Form No 16 will be sufficient, in case the income tax return (ITR) is not available. However, self-employed applicants need to submit audited accounts and if the accounts are not audited, you will need to submit the ITR form, for the last two or three years. Although the money is given against future rentals, lenders want to assure themselves about your repayment capacity, in case something happens to the lease.
The loan is secured by way of a charge, on the property that is leased out. Consequently, if you already have an existing home loan, it will be difficult for you to get this loan from any other lender, as they will not be willing to take a second charge on the money advanced. In such a situation, you can offer any other property as security for the rental loan, subject to fulfilment of the margin requirements of the lender.
However if the value of the property has appreciated substantially, after disbursal of the initial home loan, your existing home loan lender may consider your rental loan favourably.
Interest, charges and tenure of loan against rentals
Lenders normally charge a processing fee of up to 1% of the loan amount. The interest varies, depending on the profile of the borrower and across lenders.
The current rate of interest is between 10% and 13% per annum. The loan against rental is given for a maximum period of 10 years.
However, the tenure of the loan cannot exceed the residual period of the lease agreement. Additionally, for availing any credit facility, including the loan against rentals, your credit history has to be good. Otherwise, it may be difficult for you to get the loan.
(The author is a tax and investment expert, with 35 years’ experience)