Differences between Loan against Residential and Loan against Commercial Property in India
Loan against property is a form of secured loan and, therefore, a lot of people go for it because it fetches lower rates of interest and longer tenure than an unsecured loan. It is common to take a loan against residential property. A lot of people mortgage their residential property to take a loan against it. However, one can mortgage their commercial property too to take a loan against it. A lot of financial institutions provide loan against commercial property in India, but there is a difference. But, let u first understand what a commercial property is.
What is a Commercial Property?
This includes outlet, office space, shop, hotel, factory premises, resort, etc. It can be either vacant or rented/leased out, ready to occupy or under construction. A lot of financial institutions, however, may hesitate to provide loan against under-construction property and even for financial institutions that do, the rate of interest would be considerably higher because of the risk involved.
Loan against Residential Vs. Loan against Commercial Property
1. Low LTV – LTV or Loan-to-Value Ratio is low in case of commercial property because of the higher risk involved as compared to residential properties. While the LTV in case of residential property ranges from 65-80% (rest to be paid down payment), in case of commercial properties it around 50-60% depending on the lender.
2. Processing Fee – The processing fee is higher in case of loan against commercial properties. Of course, it differs from lender to lender, but some lenders charge a small percentage say 1% or so as processing fee. Therefore, you must understand all aspects completely with the lender before applying for a loan.
3. Rate of Interest – As already mentioned, the risk in case of commercial property is higher and there are a lot of factors involved like location, type of commercial property, etc. that affect the rate of interest, it is generally higher as compared to residential property.
4. Tenure – Again, because the risk is considerably higher in case of commercial properties, the loan tenure is also shorter. The loan tenure for loans against residential property can go up till 30 years; it is 10 years in case of commercial property. However, the terms may slightly differ from lender to lender.
5. Various Checks – In case of commercial properties, especially under-construction ones, the lender may want to check the builder’s credentials, his track record, and delivery schedule, etc. They verify the previous record of the builder and then decide whether to give the loan or not. There are no such checks in case of residential properties.
6. On-ground evaluation – Technical aspects like lifts, elevators, accelerators, fire extinguishers, etc. are all evaluated in case of commercial property to ensure that it complies with the norms. This is not so in case of residential properties.
7. Approved Clearance – All statutory approvals have to be in place to be granted a loan against commercial property. Clearance from the fire department, building, risk of demolition due to rejection or pending approvals, litigation issues, etc. all are evaluated before lending against commercial property.
Therefore, the terms and conditions of your loan will vary depending on whether it is a loan against residential property or loan against commercial property.
Related post-:
Quick Steps to Apply for a Loan Against Commercial Property- ( Click here )