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.
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.
Below are the different types of mortgage loans available in India:
Also read: Mortgage Refinancing: How Does It Work?
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.
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.
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.
It includes any mortgage that does not come under the following types of mortgage loans:
Mortgage loans can have two types of interest rates. These are as follows:
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.
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.
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.
|Name of the Financial Institution||Home Loan Interest Rates Start at||Loan against Property Interest Rates Start at|
|PNB Housing Finance||6.99%||8.75%|
|State Bank of India||6.80%||8.80%|
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.
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):
Also read: Tax Benefits On Loan Against Property
Given are some of the common documents required for different types of mortgage loans:
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.
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:
|Home Loan||Mortgage Loan|
|It is taken for the construction, purchase or reconstruction of a home||It is taken out for personal or business purposes|
|The interest rate is lower compared to a mortgage loan||The interest rate is usually higher than a home loan|
|Loans can be availed for up to 85% of the property’s market value||The loan can be availed for up to 60% to 70% of the property’s market value|
|The maximum repayment tenure is usually up to 30 years||The maximum repayment tenure is usually up to 15 years|
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 6.71% 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!
Ans: Yes, a mortgage is defined as a transfer of an interest in an immovable property to secure money as a loan under Section 58(a) of the Transfer of Property Act, 1882. As per this definition, home loans are classed under mortgages as a house (property) is used to secure loans.
Ans: Mortgages involve two aspects of agreements between borrowers and lenders. First, the debtor promises to repay the loan provided within a specific time. Secondly, the lender gains a conditional right to the property pledged to secure loan repayment.
Ans: LAP is a type of mortgage loan in which borrowers can avail themselves by offering their property as collateral. These loans come with no end-use restriction. So, individuals can use the loan amount for any need. They also have to keep their property documents deposited with lenders till they fully repay the loan.
Ans: A reverse mortgage loan is a special loan made for senior citizens who have a property but not a steady flow of income. It works in the opposite way of a mortgage. The borrower keeps their property as a mortgage with a financial institution, which pays a steady monthly income (like EMIs) for the rest of their life.
Ans: Given are some of the important factors that affect mortgage loan eligibility:
The applicant’s age
His/her employment status and flow of income
Loan repayment period
In addition to these, a borrower’s credit profile plays a crucial role in mortgage loan eligibility.
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