If you have rented out a property to an individual or a company, it can come handy during an emergency. You can get a loan against the rent you are yet to receive in the future from your tenant. The good part is that such a loan would be cheaper than a personal loan and your tenant will pay the equated monthly instalments on your behalf.
While most banks provide loans against rent receivables only if property is rented out to reputed companies and banks, some banks such as Indian Overseas Bank and UCO Bank provide a loan even if the premise is rented out to individuals.
How much can you get? Banks provide loans in the range of Rs 50,000 to a few crores. The exact amount of loan you can avail depends upon the quantum of future rental income that you would receive in keeping with the tenor of the lease.
Banks provide loans of up to 60-85% of the total future rent receivables after deducting tax. For instance, if you are to receive rental income of, say, Rs 10 lakh in the future, you need to pay a tax of Rs 1,19,480 (after taking into account deductions up to Rs 1 lakh under section 80C), assuming you have no other source of income. You can avail loans up to 60-85% of the balance which in this case would be in the range of Rs 5.28-7.48 lakh.
Repayment tenor: This could be as high as 10 years depending on the lease tenor as well as your repaying capacity.
The cost: The rate of interest varies between banks but in general it is 50-100 basis points less than that charged on personal loans.
You also need to pay a processing fees which again varies from bank to bank and depends on the loan amount. Most banks charge a prepayment penalty which ranges around 1-2% of the amount prepaid. But some banks such as Dena Bank do not charge any prepayment penalty.
Normally, a bank enters into a tripartite agreement with you and your tenant, whereby the tenant agrees to pay the rent directly to the bank. The bank also signs a separate term loan agreement with you.
You would be required to submit the tenancy agreement signed between you and the tenant along with the authorized building plan, title deed of the property and the latest property tax receipts. You would also need to submit your bank statement for the last few months, income-tax returns receipts for the last two-three years, a copy of your Permanent Account Number card and passport-size photographs. Some banks also need income proof or the bank statement of the tenant to ascertain their repaying capacity.
For loans up to Rs 2-3 lakh, most banks only require a third-party guarantee, but for loans of higher amounts, banks require securities such as shares and debentures, among others.