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Business owners and individuals often rely on their existing assets to unlock funding when liquidity is tight. One of the most efficient ways to do this is through a Loan Against Property—a type of mortgage loan where borrowers pledge their owned real estate to secure funds. While the process to avail the loan may appear standard, a major differentiator lies in the nature of the collateral: residential vs commercial property.
A common question that arises among borrowers is: Do mortgage loan interest rates differ based on the type of property pledged? The short answer is yes—and understanding why can help you choose the most cost-effective route.
What Is a Loan Against Property?
A Loan Against Property (LAP) is a secured loan where the borrower offers a residential or commercial property as collateral. The funds raised can be used for a variety of purposes, such as business expansion, personal needs, higher education, or even emergency medical treatment. The property remains in the borrower’s possession while the loan is being repaid.
Many leading banks and financial institutions, including ICICI Bank, offer LAP options with flexible tenure, quick processing, and transparent charges. The interest rate applicable to a LAP depends on various factors, one of the key ones being the nature of the property mortgaged.
Understanding the Role of Property Type
When evaluating loan applications, lenders assess the type of property being pledged. Broadly, these fall into two categories:
- Residential property: A house, apartment, or bungalow that is either self-occupied, rented, or vacant.
- Commercial property: Office spaces, retail shops, warehouses, or industrial spaces used for business activities.
The mortgage loan interest rates applied to each type of property tend to vary due to differences in valuation risk, liquidity, and demand.
Why Interest Rates Differ
Here’s a breakdown of the main reasons why banks may charge different interest rates based on the property type:
1. Market Liquidity and Demand
Residential properties generally enjoy higher demand and better resale value than commercial spaces. In case of loan default, a bank may find it easier to auction or resell a residential unit, making it a lower-risk asset. Consequently, LAPs against residential properties often come with lower interest rates.
2. Risk Assessment
Commercial properties are typically considered riskier due to their dependency on business viability, market cycles, and specific location factors. These properties may remain unsold or underutilized longer than residential assets, especially during economic downturns.
As a result, lenders may levy a higher interest rate on LAPs secured against commercial property to offset the risk.
3. Loan-to-Value Ratio (LTV)
The Loan-to-Value (LTV) ratio tends to be more conservative for commercial properties. While residential LAPs may offer up to 75% of the property’s market value, the LTV for commercial LAPs may offer up to 70%*, depending on the lender’s policy.
This indirectly affects the applicable mortgage loan interest rates, as lower LTVs often translate into stricter loan terms.
4. Borrower Profile
Lenders also consider the borrower’s profile—whether the applicant is salaried, self-employed, or a business entity. When the collateral is a commercial property, it’s more often associated with a business need, and the underwriting risk increases. This is another factor influencing rate differences.
Other Factors Affecting Mortgage Loan Interest Rates
Beyond property type, here are other variables that influence your mortgage loan rate:
1. Credit Score
A credit score of 750 and above usually helps in getting lower rates. A lower score may push the rate higher, especially for LAP against commercial properties.
2. Income and Repayment Capacity
Stable income with strong repayment capacity allows the lender to offer better interest terms. Commercial LAPs linked to inconsistent or seasonal income may attract risk-based pricing.
3. Loan Tenure
Shorter tenures often come with slightly lower interest rates but higher EMIs. Longer tenures may ease your cash flow but result in higher total interest payout.
4. Existing Banking Relationship
Customers with a strong banking history and existing loans or credit cards may get preferential rates. ICICI Bank, for example, considers internal credit scores and prior loan conduct when evaluating new LAP applications.
Using a Mortgage Loan Calculator for Clarity
To make informed decisions, it’s smart to use a mortgage loan calculator. These tools let you:
- Estimate monthly EMIs based on loan amount and tenure
- Compare costs between residential and commercial property mortgage options
- Assess how small rate differences affect long-term repayment
ICICI Bank offers both LAP calculators on its website, helping applicants visualise their financial commitment with transparency.
Tips to Get the Best Rate Regardless of Property Type
- Keep your credit score high
- Avoid over-leveraging your property
- Negotiate better terms if you have a strong profile
- Compare multiple offers before finalising the lender
- Provide complete documentation to expedite processing and reduce the risk premium
Final Thoughts
The type of property you mortgage—residential or commercial—has a direct bearing on the mortgage loan interest rates you’re offered. While residential properties are generally considered lower risk and qualify for better rates, commercial properties may come with slightly steeper costs due to market volatility and resale limitations.
However, that shouldn’t discourage business owners or entrepreneurs from leveraging commercial real estate for funding. A well-structured mortgage loan from a trusted institution like ICICI Bank can still offer favourable terms, especially if backed by a healthy financial profile and a clear purpose of loan use.
Before you apply, use a mortgage loan calculator to check repayment feasibility, interest impact, and loan tenure combinations. This proactive approach ensures that your decision is based on facts, not assumptions—leading to smarter, more sustainable borrowing.