For decades now, secured loans have been one of the most feasible ways of raising finance to meet big-ticket expenses. Among them, mortgage advances have been the most prominent form of funding, allowing borrowers to fulfill their financing needs. These advances allow individuals to utilize the underlying equity of their properties for raising funds. While both residential and commercial properties can be used to avail mortgage loans, there is no denying that mortgaging a residential property where you reside comes with certain challenges. This means availing of a loan against commercial property becomes easier.
However, you need to clearly understand how a commercial property loan works and how you can best benefit from it. So, here’s a detailed look at all relevant aspects.
Meaning and scope of a commercial property loan
A commercial property loan works as per the same financial principles and arrangements as any mortgage loan, albeit the mortgage involved is strictly limited to commercial properties. A commercial property loan thus means a mortgage arrangement under which one can avail financing against mortgaging a property that is used for commercial purposes. Some common examples of commercial properties include –
- Retail outlets
- Office space
- Land on rent
- Any other property put out on rent
As a loan against property, the scope of a commercial property loan’s utilization extends to all aspects of expenditure without any restriction to end-use. You can thus use the advance for either of the following big-ticket expenses.
- Personal expenditures like a child’s higher education, marriage, overseas travel, emergency medical aid, home renovation, and the likes.
- Business expenditure, which will depend on the type of business. For shop owners, it can mean expansion to new outlets, inventory upgrade, etc. In the case of small or medium businesses, it can mean up-gradation of plant and machinery, new equipment purchase, hiring skilled workforce, etc. Another example would be large-scale businesses availing a loan against commercial property to infuse necessary cash into the business for improved operational management.
Important Things to Know About Loan against Commercial Property before Borrowing
As a rule of thumb and as a financial principle though, it is always advisable that the mortgage funds be used under the same category that the property belongs to. This means that it is wise to use a commercial property loan for business purposes instead of personal expenditure to eliminate unnecessary risks.
Eligibility requirements for a mortgage loan
When availing of this mortgage loan, prospective borrowers need to fulfill a handful of eligibility criteria laid down by the lender. Commonly, these requirements include the following.
- For salaried
- Age above 21 years
- Property with a shelf life of not less than 20 years (applicable for self-employed too)
- Minimum property value as specified by the lender
- Minimum monthly income as per the city of residence
- Residential Indian citizenship
- For self-employed
- Age above 19 years
- For professionals, the certification can include doctorate, chartered accountancy, engineering, lawyer, architect, company secretary, etc.
- In the case of non-professionals, eligible categories include agents based on commission, traders, contractors, small business owners, etc.
- Residential Indian citizenship
You may be asked to meet additional requirements based on your financial profile. Simultaneously, you will also need to complete the paperwork as required.
How a loan against commercial property works
The mechanism of a commercial property loan follows the below-mentioned steps.
- Once applied, the loan application is assessed based on your borrower profile and related factors to understand the risk involved.
- Based on these, an LTV or loan to value ratio is decided to cap maximum fund availability for you. It is the percentage of your property’s current market value available as maximum funding. In the case of commercial properties, this can go up to 80%.
- Next, based on the eligibility fulfillment, property assessment, and verification, a loan amount is approved for borrowing.
- Once approved, the loan amount is disbursed to your bank account.
- Following this, you need to start repaying the advance as per the agreed schedule. Repayment needs to be made in EMIs.
- After a dedicated number of EMI payments, you can also choose to prepay your loan and/or foreclose the account any time before the tenure ends.
- You must complete repaying the entire loan within the agreed tenure. Any delay of EMI payment beyond the due date attracts a penalty.
- Complete failure of loan repayment in part or in full can compel the lender to auction the mortgaged commercial property for loan recovery.
Now you know how a loan against commercial property works and what you need to apply for one. So, what’s next? Go online and research multiple lenders and compare their offerings so that you can choose one that best suits your needs and repayment ability.