Which type of mortgage loan is best for you?

When we mortgage our property to borrow funds, a simple question arises in our minds. That’s what we can assess after negotiating on rates, tenure & amount of mortgage loan … The answer underlying the question is the use of funds…

Borrowing smartly is very important for the successful closure of the deal & also for achieving competitive terms. Below are the various uses elaborated with underlying important points to be considered while formally entering into mortgage deal.

Business Expansion:

Business expansion is the most prominent factor for borrowing funds through mortgaging property. The quantum of required funds, repayment tenure, cash flow during the repayment tenure & terms of pre-closure are some of the important aspects to be assessed while finalizing any mortgage deal.

Funding for factory building construction, buying of machinery & long-term working capital should be taken on through monthly EMI repayments. All these investments are for long-term use & are a one-time expense on asset creation, so repaying them gradually is the best use of surplus cash generated through the yearly depreciation fund. All EMI-based property loans are termed as loan against property (LAP), commercial property loan, or residential property loan.

However, the short-term working capital requirements should be met through an overdraft (OD) / cash credit limit (CC limit) facility. This facility allows you to repay as soon as surplus funds are available in the business. We need short-term working capital to mature some irregular contracts, and we have a surplus once the debtors pay back their dues. Short-term funds need to be kept in abeyance till fresh such orders are received, so if these are borrowed funds, then it should be borrowed as an OD / CC limit to use surplus funds for repaying the dues on an immediate basis & borrow again when a fresh order is received.

Property Buying:

Borrowing funds for buying property (home / factory) needs to be assessed from the perspective of available options from lenders. There are some schemes running out from the government/builders for selling their units, & assessing mortgage deal in totality will result in higher benefits, i.e., sometimes a lender gives some discount on the rate, but if the lender has not approved the project yet, then it needs to put more time & effort into maturing the mortgage deal compared to a lender who has already assessed the project & offering mortgage with predefined terms, which gives better understanding of cost of borrowings

Personal emergencies/needs:

Sometimes borrowings are necessary to meet the exigencies of life or some urgent needs that require a big chunk of money, & it’s better not to disturb the regular cash flow of the business. To meet such an emergency, a loan against property helps to overcome such needs.

Reverse Mortgage Loan:

Specially designed for retired individuals, a reverse mortgage works precisely the opposite of a mortgage loan. The individual needs to keep their property as a mortgage with the bank or with the NBFC. The lender then pays them a steady amount of income every month like EMIs.

Consider the pros & cons of the deal.

It should be clear from the above discussion that the right kind of borrowing on mortgaging the property has various such factors that are important to make or break the complete borrowing idea. Borrowing funds should be assessed in all respects. The important part of the discussion is that it can’t be termed a clear-cut mode of execution.

It is advisable to have expert advice before opting for any mortgaging deal. Understand the cost factors not only written on the loan agreement or stated on the face of the deal but also the cost of funds during the ideal period & prepayment cost & cost of re-borrowing when fresh requirements arise.

In NetShell, one should avoid borrowing against a mortgage when you can’t afford the repayment obligations. The borrowed funds should be repaid in a defined timeline & cash flow for repayment is reasonably predicted before borrowing.