What is a Mortgage Loan?

A mortgage loan is money borrowed against the collateral of a property one owns, used for purposes such as personal, business, etc., and it is repaid in EMIs over a fixed tenure. In India, it's a convenient way to access the value of one's property without having to sell it, as long as they're able to afford the EMI payments.

Quick Read

• A mortgage loan is a way to get funds by pledging a property one owns as collateral.

• It's different from a home loan, which is a loan to buy or construct a house.

• Depends on the value of the property, the amount of loan, credit score, etc.

• Tenure can go up to 15-20 years, depending on the lender and one's eligibility.

• Defaulting on the loan can cause the lender to claim the mortgaged property.

A mortgage loan is a secured loan wherein one pledges an existing property, residential or commercial, as collateral to get a loan from a lender. The property stays in one's possession and is used as, well, a property - the lender simply has a claim on it in case of default. Simply, a mortgage loan means a 'secured' loan product where one doesn't get a loan to buy the property, but secures the loan with a property one already owns. In India, these loans are mostly taken to fund business needs, education, medical expenses, weddings, and so on, since they offer larger amounts at lower rates than unsecured loans.

While applying for a mortgage loan, the lender assesses the value of a property, its ownership details, one's ability to repay the loan, etc. Based on this, the lender approves a loan amount, usually based on a percentage of the value of the property (known as the loan-to-value or LTV ratio).

The Basic Process involves: 

• Application: One applies with the necessary documents.

• Valuation: The lender values the property.

• Sanction: The lender sanctions the loan based on the valuation.

• Disbursal: One gets the money transferred to their account, usually within a few days.

• Repayment: Repay the loan via EMIs (Equated Monthly Instalments) as per the tenure agreed.

To choose better for yourself, knowing different types of loans is necessary. 

• Loan Against Property (LAP): The standard form of property deposit, wherein one takes out a lump sum loan by pledging residential or commercial property.

• Simple Mortgage: You continue to possess the property, but the lender has the right to sell the property in case of default.

• Equitable Mortgage: This type of mortgage loan works by depositing the property title deeds with the lender; used for home loans and LAP.

• Reverse Mortgage: For senior citizens, this lets them access funds by using the property as collateral, without having to sell the property.

A home loan is a loan taken to buy or construct a house, and the property bought is the collateral for the loan. On the other hand, a mortgage loan is taken out by pledging the property one already owns as collateral and can be used for any purpose. Home loans usually have lower interest rates than mortgage loans, given the specificity of their use.

Below are the main documents and requirements required to obtain a mortgage loan 

• Age: Most lenders require one to be between the ages of 21 and 65 until maturity of the loan.

• Stable income: Having a stable source of income, either as a salaried individual or self-employed.

• Credit score: A credit score of 750 or more is preferable.

• Documents: Clear property ownership documents with no legal disputes registered against the property.

Most lenders ask for standard documents like those for proof of identity, proof of address, income statements, statements of existing bank accounts, details about the property, etc. However, new-age lenders like Finnable have digitized most of the process and offer faster processing and disbursal timelines.

Given that the property is used as collateral, it's important not to default on the EMIs; the lender can take possession of the property. It's therefore advisable to take a mortgage loan one can afford to repay on time. It's also imperative to go through the fine print, especially the clauses regarding prepayment and any additional charges (such as pre-closure charges and penal interest), as one will have to bear these costs if one wishes to repay the loan before the due date.

A mortgage loan can be extremely useful in case one requires a large sum of money and has an existing property that is not pledged (or partially pledged) against another loan. The decision of one's mortgage loan should be determined by three factors: the amount one needs, whether one can afford the EMI outflows considering one's income, and how the interest and charges compare between different lenders. Remember to treat the property as collateral and not as a safety net, and one can use a mortgage loan responsibly.