Types Of Mortgage Loans: Interest Rates, Eligibility, Documents And How to Apply

Home Loan

A mortgage loan is a secured loan that you can get from a lender by offering an immovable property as collateral. Financial institutions offer mortgage loans on houses, shops, or plots of land (non-agricultural). The lender provides a certain percentage of the property’s value as the principal loan amount. Individuals can get a sizable loan amount by mortgaging such properties. 

Mortgage loans come with affordable interest rates. However, borrowers must repay this amount in regular installments over a pre-decided period, or the lender may seize it to recover outstanding dues. In India, there are different types of mortgage loans based on the requirements of borrowers. Read on to know about the types of mortgage loans.

What are Mortgage Loans and How Do They Work?

Mortgage loans are secured loans which involve collateral. The borrower avails a loan against the property. The loan amount is predefined and is repaid through monthly installments. The collateralised property is recovered, and the borrower is given full possession or rights upon successful completion of repayment.

The EMIs in the initial stage of prepayment are largely composed of the interest. Gradually, the principal component increases and the interest portion decreases. However, the EMI amount remains constant throughout the tenure. 

Different Types of Mortage Loans in India

Below are the different types of mortgage loans available in India:

1. Loan Against Property: Ideal for debt consolidation, Loan Against Property or LAP lets you borrow money against your property. So, in a way you keep your property as a mortgage and borrow money from the lender. The advantage of LAP is that you could use the amount for any purpose. Most applicants use LAP to close other loan accounts – as in they consolidate existing debts under a single loan. Since it’s a secured loan, the interest rates are mostly similar to that of home loans.
2. Lease Rental Discounting: Mortgage loans can be taken against leased properties as well. This practice is called lease rental discounting. The monthly rent is considered EMI. Lenders decide on the loan amount depending on the property lease tenure and monthly rent.
3. Commercial Purchase: A commercial purchase loan is popular among business persons and entrepreneurs. You can use this fund to buy commercial property in the form of office space and a commercial complex. The interest rates are quite competitive for such mortgage loans.
4. Second Mortage Loan: Such loans are similar to top up loans on existing home loans. If you have taken a loan to purchase a property, you can take an additional loan on the same property, provided you are eligible. Lenders would check your credit score and repayment capacity before offering you a second mortgage loan.
5. Reverse Mortgage Loan: Recently introduced in India, a reverse mortgage loan works exactly in the opposite way how a mortgage loan works. Senior citizens who are in need of a steady income could opt for this loan. A reverse mortgage loan works in a way that you could mortgage your property to the lender and the lender pays you a certain amount every month as EMIs. In case something happens to you, the lender holds the right to sell the property.
6. Home Loans: Home loans are secured loans offered by most banks and NBFCs. In the case of home loans, your property acts as collateral. However, you cannot use home loans for any other requirement other than purchasing a house or property.   

Also read: Mortgage Refinancing: How Does It Work?

Types of Mortgage Loans Based on Requirements of Borrowers

Simple Mortgage

In the case of a simple mortgage, a borrower mortgages his/her property to a lending institution for availing of a loan. While the borrower retains possession of the said property, the lender has the right to sell it to recover his dues in case of a default on payment. 

Calculation of interest rates for a simple mortgage is done daily, unlike other mortgage loans, where it happens every month.

English Mortgage

The borrower agrees to transfer ownership of the property to the lender if he/she defaults on the loan. However, the lender must transfer ownership back to the borrower upon full repayment. 

Mortgage by Conditional Sale

In this case, a property owner sells his/her property to a financial institution to secure a loan with the condition that he/she can recover it after full repayment. Agreements made for these loans stipulate that the sale becomes ‘absolute’ only if the property’s original owner cannot repay his/her loan.

According to the Transfer of Property Act, a transaction of this nature is considered to be a mortgage only when the contract is written and registered.

Usufructuary Mortgage

For usufructuary mortgages, a borrower has to transfer property rights and possession to the lender. The lender has the authority to use the mortgaged property and receive rents and any other profits until full repayment of the loan.

However, the borrower is allowed to keep his/her property papers. Moreover, he/she can get a better interest rate, and a higher loan amount as the property’s income is factored into the loan agreement. 

Subprime or Sub Mortgage Loan

People with low credit scores can apply for these different types of mortgage loans. However, these often come with higher rates of interest which are subject to increase at specific points of the repayment period.

Since lenders cannot rely on credit scores for these loans, they turn to other factors to decide the interest rates. Such factors include the size of the downpayment and the number of late payments/defaults in the borrower’s credit report.

Mortgage by Deposit of Title Deed

In this arrangement, a borrower deposits his/her title deed and other property documents to the financial institution as collateral. Also known as an equitable mortgage or implied mortgage, it involves an oral confirmation about the borrower’s intention to create a charge on the property. 

No legal document is registered in the registrar’s records for these loans.

Anomalous Mortgage

It includes any mortgage that does not come under the following types of mortgage loans:

• Simple mortgage
• English mortgage
• Usufructuary mortgage
• Mortgage by conditional sale
• Mortgage by deposit of title deed

Types of Mortgage Loans Based on Interest Rates

Mortgage loans can have two types of interest rates. These are as follows:

Fixed-Rate Mortgages

In the case of fixed-rate loans, the interest rates remain fixed throughout the repayment period. These loans have fixed EMIs and a specific number of installments as well.

With fixed-rate mortgage loans, a shorter tenure results in a higher monthly installment but lower overall interest payment. The main advantage of fixed-rate mortgages is that their rates remain constant despite market fluctuations.

This means that the borrower can count on his/her monthly EMI being the same throughout the tenure of the loan. Accordingly, he/she can set aside money for household budgets and avoid unexpected charges. 

However, fixed interest rates generally remain 1-2% higher than floating interest rates for home loans. 

Adjustable-Rate Mortgages

ARM loans come with interest rates that change over the loan’s tenure. For the initial period of these loans, the rates remain fixed and then change according to prevailing market conditions. 

Its partially fixed nature provides certainty to borrowers for the initial period. Many financial institutions also offer discounted interest rates for this period but charge a higher processing fee. 

Its main disadvantage is its unpredictable rate, which makes it challenging for borrowers to create a budget.

Variable-Rate Mortgages

Also called floating rate loans, their interest rates are subject to change based on the market conditions. The floating rate is bound to the base rate of lenders, which depends on the Reserve Bank of India’s repo rates. Floating rates are usually better options in economies experiencing growth and progress. 

Lately, floating rates have gained massive popularity as a result of RBI’s low repo rates.

Interest Rates for Different Types of Mortgage Loans

Main Parts of Mortgage Payments

Most people understand the repayment of a mortgage consists of the principal amount and interest. But there are other factors (taxes and insurance) considered for mortgage repayments. Let’s check them out in detail. 

• Principal: The principal amount is the basic amount taken from the financial institution that one has to pay back.
• Interest: This refers to the cost of borrowing. The interest rate levied by the financial institution can either be fixed or floating. The initial EMIs include mostly the interest and it gradually decreases as the principal amount goes up.
• Taxes: Every month, the lender includes the property tax amount divided by 12 in the EMIs. This amount is stored in an escrow account held by the lender, which is used when the tax bill is due to be paid. 
• Insurance: The lender always makes sure home insurance is assessed in the monthly EMIs of the property. It is collected monthly and paid to the insurance company. If needed, this insurance will also include flood insurance and private mortgage insurance (PMI). However, the PMI is dropped from monthly installments once it covers 20% equity in the property.

Eligibility Criteria for Mortgage Loans

Different financial institutions have specific criteria for various types of mortgage loans. Given are some of the standard eligibility criteria for home loans and LAP (loan against property):

• Age of the applicant: 18-70 years
• Employment status: Salaried or self-employed (Salaried employees must be employed with a private sector, public sector or multinational company.)
• Residential status: Indian citizen residing in the country (Some financial institutions offer mortgage loans for NRIs as well.)
• Work experience: At least 3 years for salaried applicants and 5 years for the self-employed individuals
• CIBIL score: Usually 750 and above 
• LTV (loan to value) ratio: Up to 80% for LAP and a maximum of 90% for home loans

Also read: Tax Benefits On Loan Against Property

Documents Required to Avail Mortgage Loans

Given are some of the common documents required for different types of mortgage loans:

• Recent passport-sized photographs
• Identity proof (PAN card, voter ID card, Aadhaar card, etc.)
• Proof of residential address (Aadhaar card, driving license, rent agreement, utility bills, etc.)
• Bank account statements
• Latest salary slips
• IT returns
• Property documents (title deed, registered sales deed, conveyance deed, approved building plan, property tax receipt, etc.)

How to Apply for a Mortgage Loan in India

The following steps will illustrate the process of applying for a home loan in India.

Step 1: Go to the official website of the lender and visit the home loan page.

Step 2: Provide the property details such as location, type of property and the address.

Step 3: Fill in the basic details such as name, age, marital status and co-applicant’s name along with the PAN number.

Step 4: Check your eligibility in the final step for approval. 

Key Differences between Mortgage Loans and Home Loans

A home loan is taken for the construction or upgrade of a property where the property itself is kept as collateral. A mortgage loan is a loan against a property where one can avail of financial assistance by keeping collateral.

Here are some major differences between a home loan and a mortgage loan:

Final Word

There are many different types of mortgage loans with different terms of financing. These are popular options among borrowers as it offers high-value funds at affordable interest rates. Moreover, the long tenure makes the repayment much easier for borrowers. Home loans come with competitive interest rates. Navi offers funds of up to Rs. 10 crore at interest rates starting from 7.39% p.a. to help you finance the purchase of your dream home. Install the Navi app on Android or iOS now and get instant in-principle approval right away!

FAQs on Types of Mortgage Loans

Before you go…

Are you looking to buy that house you’ve been eyeing 🏠 and you need a loan of up to ₹5 crore. Install the Navi app now and get instant in-principle approval right away! Interest rates starting at 7.89% p.a.

Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.