Amongst various means to opt for financing, getting a mortgage loan is an easy and secure way for borrowers. While opting for a loan, borrowers typically have to pledge property as collateral, depending on the nature of the loan and the amount. A mortgage loan functions on the base–a house or commercial property is pledged against the loan amount.
A mortgage loan, also known as a loan against the property, helps borrowers with their financial needs. Because the property acts as collateral, it helps them with favourable terms and interest rates.
This article will cover different components of a mortgage loan, including what a mortgage loan is, how it functions, the different types, and the advantages and disadvantages of getting a mortgage loan.
What is a Mortgage Loan?
Getting a loan for a significant amount is a challenge for individuals as well as for businesses. The hassle-free solution is to go for a mortgage loan. It helps in funding purchases for another property for business or personal usage. A mortgage loan allows you to access funds in exchange for marking your property as collateral to the lender, bank, or institution.
The typical mortgage loan interest rates vary from 8% to 12% in India. As a borrower, you can avail funds up to 60%-70% of the property’s official or registered value. In many cases, based on eligibility and credibility, the percentage can be on the higher side; however, it depends on where you opt for a mortgage loan.
A mortgage loan is an easier option to finance a home or commercial property with a repayment tenure of up to 15 years. Because the borrower provides the property as collateral, in case of failure to repay the amount, the lender has the right to seize it. There might be a grace period provided to repay the outstanding loan amount. Though the lender has the right to auction or sell the property to recover the amount.
How Does a Mortgage Loan Work?
Let’s discuss this with an example. Suppose you have a house worth Rs. 70 lakh and now want to purchase land worth Rs. 60 lakh. You have saved around Rs. 15 lakh, and you are looking for financing options for the rest. If you choose options such as a personal loan to facilitate the purchase of land, the annual interest can go beyond 30% (depending upon the financial institution you choose). Paying long and high EMIs every month is not a wise option. Thus you decided to get a mortgage loan against your home.
The interest offered by public sector banks is generally favourable compared to private banks, and that’s what you chose. The bank offered you a mortgage loan for 65% of the house value at a 10% annual rate for 15 years.
This translates to:
You have Rs. 50,000 in surplus balance. By opting for this mortgage loan, you are obligated to pay off the principal and interest amounts (10% annually) every month as EMI to the bank for 15 years. If you fail to do so, the bank has the right to foreclose your house to recover the money.
What Are the Types of Mortgage Loans?
Depending on the requirements, mortgage loans can be classified into seven categories as below.
Fixed-Rate Mortgage Loan: As the name suggests, the interest rate is constant throughout the tenure of the mortgage loan, thus, requiring the exact EMI amount each month.
Adjustable Mortgage Loan: In this loan, you can expect a definite interest at the beginning for a short timeframe, followed by a change in rates. It favours borrowers with lower rates in the short term.
Simple Mortgage Loan: This is one of the most prevailing mortgage loans in which the lender has the right to sell your property to recover the amount in case of failure to repay the money. It is important to note that only the rights to sell the property are contracted, not the actual property.
Usufructuary Mortgage Loan: In this mortgage loan, the borrower allows the lender to have possession of the property until the repayment is made. However, the borrower can collect rent as well as can keep the profit from the sale of the property.
English Mortgage: This mortgage loan works on the basis of a contract that classifies that in case of failure in repayment, the borrower would transfer the property rights to the lender. However, once the borrower repays the entire amount, the property will be transferred back to the borrower.
Subprime or Sub Mortgage Loan: This loan is specifically designed for individuals with low credit scores. The risk is high for the lenders; thus, interest rates are also high for this type of loan.
Reverse mortgage: This mortgage loan is designed for senior citizens to help them live a financially secured life. The house is mortgaged, and the borrower receives regular monthly income in old age. This mortgage type has been recently introduced in India; it helps elderly people leverage their home equity to live in later years.
What Are the Eligibility Criteria for Getting a Mortgage Loan?
You need to fulfill the below criteria to get eligible for a mortgage loan. Please note that depending on the bank or institution, this may vary.
- Age should be at least 21 years or older
- Proof of the income
- Details of your dependents
- Property valuation as well as liabilities
Also, you would need the following documents to avail a mortgage loan.
Advantages of Mortgage Loans
- It is a low-cost way to get credit compared to other loans.
- You can avail yourself of a large sum against your property without hassle.
- Repayment can be made via easy monthly EMI options, reducing your financial burden.
- The loan tenure is reasonably long (up to 15 years), providing enough time to pay it back.
- It helps you finance other properties or projects based on the loan type.
- Different mortgage loan categories are available to choose from per the requirements.
Disadvantages of Mortgage Loans
- It is a secured loan with your property as collateral. Thus, failure in repayment can lead to the lender selling your property.
- If you decide to pay a small amount in monthly EMIs, the cost of a mortgage loan increases as you pay more interest in the long term.
- If you have a bad credit record, the interest amount and loan condition would not be favourable.
Conclusion
A mortgage loan is like any other collateral loan except for you pledging your property here. It helps you get access to funds quickly with simple monthly EMI opinions to pay back the amount. You can finance a new personal or business property or any other project using mortgage loan funds. However, if you fail to repay the loan amount, the lender has the legal right to sell your property to recoup the payment.
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