Your Guide To Avail Of Loan Against Rent Receivables
Suppose you have a property that you have let out to a company. You feel that if you improve the condition of your property, it will increase the prospects of earning more rental income. However, you lack the financial resources to do so.
This is where the system of loan against rent receivables (LARR) comes into picture.
What is loan against rentals?
With a large number of multinationals setting up shop here, India's demand for commercial and residential rental housing stock has gone up substantially in the past couple of years. To cater to this segment of the market and to address the financial requirement of people renting properties, banks have introduced LARR, under which they provide you loan against the expected future rentals of your property.
Before you approach the bank for this product, ensure you meet the following conditions:
- The property leased out must be built according to government guidelines.
- The notarised lease agreement must have been signed between you and the person/company you have rented the property to.
- Both the parties must be creditworthy.
- The property used as primary security must be leased out.
- The lease must have been signed at least three months before applying for the loan.
- A tripartite agreement is signed among the lessor, the lessee and the bank before a loan approval.
- You must have the income-tax returns (ITR) filed for your rental income.
- Your bank statement should reflect the monthly rental specified in the lease agreement.
Features of LARR
- Under LARR, you can avail of loans for construction and repair of residential and commercial properties and purchase of plots. You can also get a loan for commercial activities like businesses, start-ups and education expenses.
- The loan amount you can apply for varies from Rs 2 lakh to Rs 10 crore. Loans above Rs 10 crore are offered on a case-to-case basis and are subject to terms and conditions.
- The loan tenure could be 120 months -- with a monthly instalment for repayment -- or residual lease tenure, whichever is less. For instance, if you have three tenants whose lease agreement expires in two, four and five years from the date of applying for the loan, the bank will offer a tenure of two years.
- Your property acts as the security for the loan.
- The loan-to-value ratio will be restricted to a maximum of 85 per cent of the property's market value. However, it may vary from bank to bank.
Banks sanction your loans under LARR on the basis of the value of the asset offered as collateral and the tenure of the lease agreement. Among the things factored in to measure your eligibility will be the net rent figure (after deducting taxes and dues), the lease tenure and the quantum of future lease rentals. For instance, the quantum of the loan with a lease lock-in period of three years will be higher, say 80-85 per cent, while the loan with a lease lock-in period of 7-10 years will be, say, 50-55 per cent. Among the other factors that can be taken into account to calculate eligibility are the current and prospective income from the leased-out property, the trend of the rent in that particular area, other income of the applicant, etc. The lease security amount is excluded while calculating the eligibility.
The repayment of a loan under LARR varies from bank to bank. While applicants are generally asked to open an account with the lender where all the rental income must be deposited, some banks take the repayment directly from the tenant's account. If the rent amount is more than the EMI amount, the remaining sum is credited to the applicant's account. Some banks also pre-sign an agreement with you in which your tenant is asked to deposit the rent in your account with the lender and the EMI gets deducted from this account accordingly.
Also, the fixed-obligation-to-income ratio (Foir) has to be kept at or below 100 per cent. Your fixed monthly payment obligation vis-à-vis your monthly income is known as Foir. This means the EMI amount must exceed the monthly net rental amount. Any increase in the amount is never taken into account till it is verified and mentioned in the new lease agreement. Banks charge 100 per cent Foir if an applicant who is getting rent from multiple tenants or has other sources of income. In other cases, the Foir percentage is a lot lower.
The technical valuation
Technical analysis forms an important part of the credit appraisal for availing of a loan under LARR. It is done to ascertain the market value of the property and to assess if the authority's guidelines have been met while constructing the property. Many banks get it done in every two years.
You must have a clear property title for the rented property, and you must be the main applicant to avail of the loan.
The legal valuation
A power of attorney (PoA) in favour of the lender forms an important part of legal documentation. This states that in case of default from the tenant, the lender will receive rent from the applicant. There must be a written lease agreement between the owner and the lessee, clarifying the period of tenancy, monthly rent, security money, maintenance charges and taxes, rental escalation clause, etc.