Introduction to Types of Mortgages

A mortgage means borrowing money by putting down a property as the security for the loan taken. The most common types of mortgage in India are home loans, Loans Against Property, reverse mortgage loans, etc.

Quick reads

• A mortgage is the borrowing of money by pledging property as collateral for the loan.

• The person who borrows the money retains the ownership or possession of the property based on the type of mortgage.

• There are different provisions regarding property possession and repayment of the loan and the lender’s rights in the various types of mortgages.

• Loans Against Property are one of the most common preferred mortgage loans in India. 

The term "mortgage" refers to an agreement in which a property acts as collateral for borrowing money. Since the property is provided as collateral for the loan, the lender has the option of taking steps regarding the property in case the borrower is not able to pay it back. In India, there are various ways in which mortgages can be done based on the manner of collateralization, repayment, and agreement between the lender and borrower.

In its simplest form, a mortgage is an agreement made between a lender and a borrower using real estate as collateral for a loan. One advantage of mortgages is that they can be found in different forms, such as fixed-rate or adjustable mortgages. 

In a mortgage, the real property becomes the security for your loan. To apply for a mortgage loan from your desired lender, you have to satisfy a number of conditions, such as having the required credit score and enough income to pay the down payment.

Mortgage loans vary depending on factors such as the interest rate, the intended use of the loan, and the kind of property involved. Knowing the different types can help you choose the one that suits your needs.

Based on Interest Rate

Fixed-rate Mortgages

Under this mortgage, the interest rate remains unchanged until the loan is fully repaid. This keeps your EMI more predictable and makes it easier to manage your monthly budget.

Floating-rate Mortgages

In the case of a floating-rate mortgage, which is also called an adjustable-rate mortgage, the interest rate will keep changing from time to time. The interest rate here will usually be tied to the market interest rate or index, meaning the EMI of the borrower will either go up or down depending on how the market is doing.

Based on Purpose and Property Type

Home Loans

This type of loan is usually considered to purchase a house or any residential property. This property acts as security for the loan that you are borrowing. You pay back the total amount in EMIs on a monthly basis for a tenure of 15 to 30 years.

Loan Against Property (LAP)

Loan Against Property is yet another type of mortgage loan in which the individual borrower puts up their own property as collateral. LAP differs from a home loan. A home loan is meant for buying property, while LAP is used for various purposes, such as expanding a business, financing education, etc.

Commercial Mortgage Loans

These loans are used to buy or refinance commercial properties such as shops, offices or warehouses. The eligibility rules and documents required may be different from those for a home loan.

Reverse Mortgage

In a reverse mortgage loan, the borrower gets monthly payments or the total amount of cash against the equity in their house. The lender gets their money back when the borrower sells the house themselves, or they pass away, and the lender sells the property to get back the loan. A reverse mortgage loan is a suitable choice for senior citizens who want to make use of the equity of their houses without having to sell them.

Each mortgage loan type is designed to serve a specific purpose. Before choosing one, consider why you need the loan, how much you can repay each month, and the type of property you own or want to buy.

The mortgage loan application procedure in India typically consists of a number of basic steps ranging from eligibility check and filling out the application form to property verification and loan approval. Upon completion of all the requirements, the lender releases the loan amount.

Eligibility Checking

In India, before taking a mortgage loan, there are many eligibility criteria that one needs to meet to take a loan, such as: 

• Salary: The loan applicant’s salary is checked by the bank to find out the repayment capacity of the borrower.

• Credit Score: Generally, the credit score should be more than 650.

• Property Documents: The legitimacy of the property is confirmed by the bank.

Loan Application

In this process, the loan applicant is required to submit a loan application along with supporting documents, including identification proof, address proof, income details, and property-related paperwork.

Verification and Approval

After completing the application process, there will be verification of the documents for both the borrower and the property. Upon checking, the loan will be sanctioned.

Disbursement

The lender releases the loan amount once the application is approved. This process is done in phases for home loans.

Understanding the various types of mortgage loans can help you make a well-informed decision when choosing the right loan for your needs. Be it buying a house, utilizing equity in your property, or preparing yourself for retirement, mortgage loans give you options. With India's property market experiencing significant growth, the demand for different types of home loans continues to rise. For those who are planning on taking a mortgage loan for any purpose, like buying a property, etc., one can make use of the EMI calculator from Finnable to calculate their EMI amount.