Different Types of Mortgage Loans In India

The most appealing, the most favoured and the most popular secured loan is undoubtedly mortgage loans. They shower endless features, benefits, and variety in their offers. Banks and NBFCs offer this secured loan. The borrowers pledge their real estate or property to lenders in order to get funds. Approximately 70% of the current property value is offered as the loan amount. There are many types of mortgage loans that are offered based on what will appeal to people. Business houses or individuals pledge their owned property as collateral for security.

What are Mortgage Loans and How Do They Work?

Mortgage loans are a common financial tool used by individuals to purchase homes. They operate on a simple principle: a borrower secures a loan from a lender to buy a property, and the property itself serves as collateral for the loan. Here's how they work:

1. Loan Acquisition: When a person wishes to buy a home but lacks the full purchase price, they apply for a mortgage loan from a bank, credit union, or mortgage lender. The lender evaluates the borrower's creditworthiness and financial situation before approving the loan.
2. Collateral: The property being purchased serves as collateral for the mortgage. This means that if the borrower fails to repay the loan as agreed, the lender has the right to seize the property through a legal process known as foreclosure.
3. Repayment: Mortgage loans typically come with a fixed or adjustable interest rate and a predetermined repayment term, often spanning 15 to 30 years. Borrowers make regular monthly payments to the lender, which include both principal (the loan amount) and interest.
4. Equity Building: As borrowers make payments over time, they gradually build equity in their homes. Equity is the portion of the property's value that the borrower owns outright, beyond the remaining loan balance.
5. Ownership Transfer: Once the mortgage is fully repaid, the borrower gains complete ownership of the property, and the lender no longer has a claim on it.

Six Different Types of Mortgages in India

1. Loan against Property (LAP)

Loan against Property is commonly known as LAP. LAP is offered for commercial and residential properties. The borrowers have to mortgage their property in order to get funds from lending institutions. The original documents of the property have to be deposited with the lender till the time the loan is repaid in full. The repayment of such loans is done on EMI basis. Borrowers can use the loan amount for any personal or professional needs. Many banks and NBFCs provide an option to calculate loan against property EMI on their website. This is for the convenience of the borrowers. These loans usually have a tenure of up to 15 years.

2. Commercial Purchase

Commercial purchase loans are popularly taken by businessmen and entrepreneurs. They take such loans to buy commercial properties like a shop, office space, and commercial complex. This loan is apt for such purchases. The interest rates offered by banks and NBFCs are competitive. Funds from this loan have to be used to buy the property only.

3. Lease Rental Discounting

Leasing our own residential or commercial property is a very common practice. Mortgage loans can be taken against the leased properties too. This is known as ‘lease rental discounting’. The monthly rent amount itself is converted into EMI and the loan amount is given on that basis. The loan tenure and the loan amount, both depend on the tenure as to till when the property will be kept leased. The lease agreement is referred to by banks and NBFCs who are offering the loan.

4. Second Mortgage Loan

Banks and NBFCs offer Second Mortgage Loan for properties which are already under a loan. If a borrower purchases his property by taking a loan today, he can take an additional loan on the same property for personal needs. When a borrower applies for a Second Mortgage Loan, it is commonly called a top-up loan on a home loan. Based on the borrower’s credit score as well as loan repayment history, the lender will give additional required loans. The borrower has to start paying the EMI of the second mortgage loan along with the first mortgage home loan.

5. Reverse Mortgage

A reverse mortgage has been recently introduced in India. It is a special loan, which is introduced for senior citizens. There are many senior citizens who do not have a steady or an adequate monthly flow of income. However, many of them own real estate in some form or the other. So they can opt for this. A reverse mortgage works exactly the opposite of mortgage loans. The way it works is that they have to keep their property as a mortgage with the bank or with the NBFC. The lender then pays them a steady amount of income every month like EMIs. On the death of the senior citizen, the bank or the NBFC has the right to sell the property. The loan amount that is paid to the senior citizens is directly deducted from the amount in which the real estate is sold. The residual amount is given back to the legal heirs of the deceased senior citizens.

6. Home Loan

The most commonly sought after home loan in India is a home loan. Consumers apply for small, medium, and real big-sized home loans. This is because the interest rates are competitive, durations are comfortable, and one gets a tax benefit. One gets the opportunity to refurbish, renovate, and re-build their house. One can take a home loan for purchasing land to build a house or to construct a house on land that is purchased or to even buy an under-construction property. This can be done for new or resale properties. However, the funds that are taken as a loan by the borrower have to necessarily be used for the house only. Such funds cannot be used for any other personal or business needs.

Types of Mortgage Loans Based on Requirements of Borrowers

Mortgage loans are versatile financial instruments tailored to the diverse needs of borrowers. Depending on specific requirements and agreements, various types of mortgages come into play, each with its distinct characteristics and legal nuances.

Simple Mortgage

A straightforward type where the borrower pledges the property as security for the loan. The lender has the right to sell the property in case of default.

Mortgage by Conditional Sale

In this arrangement, the property's sale is conditional upon repayment. If the borrower defaults, the sale becomes absolute.

Usufructuary Mortgage

The borrower delivers possession of the property to the lender, who enjoys its income until the debt is repaid.

English Mortgage

Here, the borrower transfers the property title to the lender, with the intention of retransferring upon repayment.

Mortgage by Deposit of Title Deeds

Borrowers offer title deeds as security, with an understanding that they will be returned upon full repayment.

Anomalous Mortgage

A catch-all category encompassing unique or unconventional mortgage arrangements not fitting into standard categories.

Types of Mortgage Loans Based on Interest Rates

When it comes to mortgage loans, interest rates play a pivotal role in shaping the borrower's financial commitment. Let's explore the three main categories based on how interest rates are structured:

Fixed-Rate Mortgages

These offer stability with a consistent interest rate throughout the loan term, making monthly payments predictable and suitable for long-term planning.

Adjustable-Rate Mortgages

Featuring a variable interest rate that adjusts periodically, these loans offer initial lower rates but can fluctuate with market conditions.

Variable-Rate Mortgages

Also known as floating-rate mortgages, they have rates that can change regularly, directly influenced by market fluctuations, offering potential savings or increased costs for borrowers.

How to Apply for a Mortgage loan?

Applying for a mortgage loan in India involves a systematic process to ensure your eligibility and secure the financing you need for your dream home. Here are the key steps:

Step 1: Research and Select a Lender:

Begin by researching reputable lenders in India and visit their official websites to explore available home loan options.

Step 2: Property Details:

Provide essential property details, including the property's location, type, and address, to help the lender assess the loan amount and terms

Step 3: Personal Information:

Fill in your personal information, including your name, age, marital status, and, if applicable, the co-applicant's details, along with their PAN (Permanent Account Number).

Step 4: Eligibility Check:

The final step involves a thorough eligibility check by the lender to assess your creditworthiness and overall financial health. This step helps determine whether your application is approved and the terms of the mortgage loan.