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All about 'loan against rent receivables'

April 30, 2009 14:18 IST

Do you have a residential or commercial property? Do you want to improve the condition of this property to enhance your prospects of earning higher rent, but lack the necessary financial resources for the same?

Don't worry, there is help in the form of loan against future rent receivables. It is a loan that you can take against the future rental income of your property.

This type of loan is generally available to individuals who own a property that has been rented out to blue chip companies, multinational companies and public sector companies. However, certain banks offer this loan only to those individuals who own commercial property.

Before offering this loan, the banks will take care to ensure that he following conditions have been met:

  • The property has been rented out.
  • The property has been built according to the plan approved by the local government authorities.
  • There is a confirmed lease agreement between you and your tenant.
  • You and your tenant are worthy of giving credit.

Once the banks have checked the above criteria, they start processing your application. Normally, the bank enters into a tripartite agreement with you and your tenant as well as a term loan agreement is signed between you and the bank, prior to approving the loan.

As per this agreement, the tenant has to pay the rent to the bank directly. Here you and your tenant will have to give an undertaking to this effect to the bank.

In case it is not possible to give such an undertaking, like when there are many tenants in one property, you are required to inform this to the bank. You are also required to pay the borrowed amount along with interest in equated monthly installments.

Certain banks allow you to open multiple rent loan accounts if the tenants are many. In order to avail this loan, you must fill out the usual application form. You need to submit a proof of identity like passport, voter ID, ration card or PAN card.

You should also submit your photograph along with last six months of bank statements. Moreover, most banks require you to submit tenancy agreement, signed between you and the tenant, the authorised building plan, title or lease deeds and the most recent property tax receipt as well as rent receipt.

In case of certain banks, you may be asked to provide income tax returns or income tax assessments of the last three years, as well as the certified balance sheets or P&L accounts of the tenants for the last three years.

Once your papers are in order, the processing of your loan application begins. You can expect to get up to 90 per cent of the discounted value of future rent receivables. The interest rates vary from bank to bank. While most of the banks charge floating rate interest on this type of loan, certain banks do have the fixed interest rate option as well.

Also if you have had a good banking relationship and an impeccable past repayment record with the bank, you can expect to get a better rate on the loan. Additional charges include processing fee, prepayment fee (if you plan on closing the loan early), and overdue penalty if you default on making your payment.

The loan tenure will also vary. The banks tend to offer the remaining portion of the lease or rent agreement as the tenure of the loan. E.g. if you have three tenants, whose lease agreement expires in two, four and five years from the date of applying for the loan, the banks will offer the tenure of two years.

What can you do with these loans? Well, for one, they can be used in lieu of personal loans. As your property is used by the bank as security against which you are given the loan, the interest rates on these loans tend to be lower than the rates for personal loans, helping you save more on total loan cost.

Whatever your requirement maybe, whether you have a medical emergency or want to finance your children's education these loans are sure to help you achieve your objective.

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